SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Cellular Biomedicine Group, Inc.
Form: 10-K
Date Filed: 2018-03-05
Corporate Issuer CIK: 1378624
© Copyright 2018, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-36498
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CELLULAR BIOMEDICINE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
State of Incorporation
86-1032927
IRS Employer Identification No.
19925 Stevens Creek Blvd., Suite 100
Cupertino, California 95014
(Address of principal executive offices)
(408) 973-7884
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value $.001 per share
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second
fiscal quarter – $92,318,196 as of June 30, 2017.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of February 11, 2018, there
were 17,430,762 shares and 17,003,968 shares of common stock, par value $.001 per share issued and outstanding, respectively.
THE INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT ON FORM 10-K, TO THE EXTENT NOT SET FORTH HEREIN, IS
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Documents Incorporated By Reference
INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO THE ANNUAL MEETING OF
STOCKHOLDERS, WHICH DEFINITIVE PROXY STATEMENT SHALL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120
DAYS AFTER THE END OF THE FISCAL YEAR TO WHICH THIS ANNUAL REPORT ON FORM 10-K RELATES.
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Table of Contents
PART I
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16
SIGNATURES
CELLULAR BIOMEDICINE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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Cautionary Note Regarding Forward-looking Statements and Risk Factors
This Annual Report on Form 10-K, or this Annual Report, may contain “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation
Reform Act of 1995, which are subject to the “safe harbor” created by those sections. Our actual results could differ materially from those anticipated in these
forward-looking statements. This annual report on Form 10-K of the Company may contain forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project," and similar
expressions identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed to be forward-
looking statements, including plans, strategies and objectives of management for future operations; proposed new products, services, developments or industry
rankings; future economic conditions or performance; belief; and assumptions underlying any of the foregoing. Although we believe that we have a reasonable
basis for each forward-looking statement contained in this report, we caution you that these statements are based on a combination of facts and factors currently
known by us and our projections of the future, about which we cannot be certain. Such "forward-looking statements" are subject to risks and uncertainties set
forth from time to time in the Company's SEC reports and include, among others, the Risk Factors set forth under Item 1A below.
The risks included herein are not exhaustive. This annual report on Form 10-K filed with the SEC include additional factors which could impact the
Company's business and financial performance. Moreover, the Company operates in a rapidly changing and competitive environment. New risk factors emerge
from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the impact of all risk factors on the
Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements. Forward-looking statements in this report include, but are not limited to, statements about:
● the success, cost and timing of our product development activities and clinical trials;
● our ability and the potential to successfully advance our technology platform to improve the safety and effectiveness of our existing product
candidates;
● the potential for our identified research priorities to advance our cancer and regenerative disease technologies;
● our ability to obtain drug designation or breakthrough status for our product candidates and any other product candidates, or to obtain and maintain
regulatory approval of our product candidates, and any related restrictions, limitations and/or warnings in the label of an approved product candidate;
● the ability to generate or license additional intellectual property relating to our product candidates;
● regulatory developments in China, United States and other foreign countries;
● the potential of the technologies we have acquired, such as the acquisitions of the technologies from AG, Blackbird, and the PLAGH (each as
defined below);
● fluctuations in the exchange rate between the U.S. dollars and the Chinese Yuan;
● the changes associated with our move to the new Zhangjiang building in Shanghai;
● our plans to continue to develop our manufacturing facilities.
Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of the Company's views as of the date the
statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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ITEM 1. BUSINESS.
PART I
As used in this annual report, "we", "us", "our", "CBMG", "Company" or "our company" refers to Cellular Biomedicine Group, Inc. and, unless the context
otherwise requires, all of its subsidiaries or deemed controlled companies.
Overview
Cellular Biomedicine Group, Inc. is a clinical stage biopharmaceutical company, principally engaged in the development of therapies for cancer and
degenerative diseases utilizing proprietary cell-based technologies. Our technology includes two major platforms: (i) Immune cell therapy for treatment of a broad
range of cancer indications comprised of technologies in Chimeric Antigen Receptor modified T cells (CAR-T), T-Cell Receptor (TCR), cancer vaccine, and ex
vivo expanded autologous Central Memory T Cells (Tcm), and (ii) human adipose-derived mesenchymal progenitor cells (haMPC) for treatment of joint and
autoimmune diseases. CBMG’s Research & Development facilities are based in China and the U.S., and its manufacturing facilities are based in China in the
cities of Shanghai, Wuxi, and Beijing.
We are focused on developing and marketing safe and effective cell-based therapies based on our cellular platforms, to treat cancer, orthopedic
diseases and metabolic diseases. We have developed proprietary technologies and know-hows in our cell therapy platforms. Our primary target market is
Greater China. We believe that our cell-based therapies will be able to help patients with high unmet medical needs. We expect to carry out clinical studies
leading to the eventual CFDA approval of our products through Biologics License Application (BLA) filings and authorized clinical centers throughout Greater
China.
We are conducting clinical studies in China with our stem cell based therapies to treat knee osteoarthritis (“KOA”). We have completed a Phase IIb
autologous haMPC KOA clinical study and published its promising results. Led by Shanghai Renji Hospital, one of the largest teaching hospitals in China, we
have also completed a Phase I clinical trial of our off-the-shelf allogeneic haMPC (AlloJoinTM) therapy for treating KOA patients. In addition, we have received an
award of $2.29 million grant from California Institute of Regenerative Medicine’s (CIRM) and we have started manufacturing AlloJoinTM product in California to
support preclinical and clinical studies in the United States for the KOA indication.
We have launched multiple clinical trials using our CAR-T products in multiple indications such as Diffuse Large B-cell Lymphoma (DLBCL) and Acute
Lymphoblastic leukemia (ALL). We may also establish partnerships with other companies for co-development in CAR-T, TCR-T and stem cell based therapies.
We are striving to build a highly competitive research and development function, a translational medicine unit, along with a well-established cellular
manufacturing capability and ample capacity, to support the development of multiple assets in multiple indications. These efforts will allow us to boost the
Company's Immuno-Oncology presence and pave the way for additional future partnerships.
Corporate History
Cellular Biomedicine Group, Inc. was incorporated in the State of Delaware and its corporate headquarters is located at 19925 Stevens Creek Blvd.,
Suite 100 in Cupertino, California. The Company is focusing its resources on becoming a biotechnology company bringing therapies to improve the health of
patients in China.
Cellular Biomedicine Group, Inc., a Delaware corporation (formerly known as EastBridge Investment Group Corporation), was originally incorporated in
the State of Arizona on June 25, 2001. The Company's principal activity through June 30, 2005 was to manufacture mobile entertainment products.
In 2005, the Company decided to exit the mobile entertainment market and dedicate its activities to providing investment related services in Asia, with a
strong focus on high GDP growth countries, such as China. The Company concentrated its efforts in the Far East (Hong Kong, mainland China, Australia) and in
the United States and sought to provide consulting services necessary for small to medium-size companies to obtain capital to grow their business, either to
become public companies in the United States or to find joint venture partners or raise capital to expand their businesses.
On February 6, 2013, the Company completed a merger to acquire Cellular Biomedicine Group Ltd. In connection with the merger, effective on March 5,
2013, the Company (formerly named “EastBridge Investment Group Corporation”) changed its name to “Cellular Biomedicine Group, Inc.” In addition in March
2013 we changed our corporate headquarters from Arizona to California.
From February 6, 2013 to June 23, 2014, we operated the Company in two separate reportable segments: (i) Biomedicine Cell Therapy (“Biomedicine”);
and (ii) Financial Consulting (“Consulting”). The Consulting segment was conducted through EastBridge Sub. On June 23, 2014, the Company announced the
discontinuation of the Consulting segment as it no longer fit into management’s long-term strategy and vision. The Company is continuing to focus its resources
on becoming a biotechnology company bringing therapies to improve the health of patients in China.
On September 26, 2014, the Company completed its acquisition of Beijing Agreen Biotechnology Co. Ltd. ("AG") and the U.S. patent held by AG’s
founder. AG is a biotech company with operations in China, engaged in the development of treatments for cancerous diseases utilizing proprietary cell
technologies, which include without limitation, preparation of subset T Cell and clonality assay platform technology for treatment of a broad range of cancers.
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Recent Developments
In January 2016, we launched a Phase I clinical trial of an off-the-shelf allogeneic haMPC AlloJoin™ therapy for KOA (the “Allogenic KOA Phase I Trial”)
to evaluate the safety and efficacy of AlloJoin™, an off-the-shelf allogeneic adipose derived progenitor cell (haMPC) therapy for the treatment of KOA.
On March 23, 2016, the Company filed a Form S-3 Registration Statement (the “S-3 Registration Statement”) with the SEC, which was declared
effective on June 17, 2016. The S-3 Registration Statement contains three prospectuses:
● Offering Prospectus. A base prospectus which covers the offering, issuance and sale by us of up to $150,000,000 of our common stock, preferred
stock, debt securities, warrants, rights and/or units;
● Resale Prospectus. A prospectus to be used for the resale by the selling stockholders of up to 3,824,395 shares of the Common Stock; and
● Sales Agreement Prospectus. A sales agreement prospectus covering the offering, issuance and sale by the registrant of up to a maximum
aggregate offering price of $50,000,000 of the Common Stock that may be issued and sold under a sales agreement with Cantor Fitzgerald & Co.
On August 5, 2016 we completed patient treatment for the Allogenic KOA Phase I Trial. And on December 9, 2016 we announced interim 3-month
safety data from the Allogenic KOA Phase I Trial in China. Preliminary results from interim analysis have demonstrated a safety and tolerability profile of
AlloJoinTM in the three doses tested, and no serious adverse events (SAE) have been observed. The trial has been completed and we are analyzing the results
on cartilage regeneration as well as recent development in the competitive landscape.
On November 29, 2016 we announced the approval and commencement of patient enrollment in China for our CARD-1 (“CAR-T Against DLBCL”)
Phase I clinical trial of CD19 CAR-T therapy utilizing our optimized proprietary C-CAR011 construct for the treatment of patients with refractory DLBCL. The
CARD-1 trial has begun enrollment with more data expected to be available in the first half of 2018.
On December 9, 2016 we announced interim 3-month safety data from our Phase I clinical trial in China for AlloJoin™ off-the-shelf allogeneic stem cell
therapy for KOA. The preliminary data was presented in December 2016 at the World Stem Cell Summit in West Palm Beach, Florida. The interim analysis of
the trial has preliminarily demonstrated a safety and tolerability profile of AlloJoin™ in the three doses tested, and adverse events (AE) are similar to that of our
prior autologous trials. No serious adverse events (SAE) have been observed.
On January 3, 2017, we announced the signing of a ten-year lease of an 113,038-square foot building located in the “Pharma Valley” in Shanghai
Zhangjiang High-Tech Park. The new facility designed and built to GMP standards will consist of 40,000 square feet dedicated to advanced cell
manufacturing. We plan to invest an aggregate of approximately $35 million into the Zhangjiang facility, of which $10 million will be spent to bring the facility into
compliance with current GMP standards and around 25 million will be spent on lease of this real estate. By the end of 2017, the combination of new Zhangjiang
facility, an expanded Wuxi, and Beijing facilities, all meeting international GMP standards, of the Company had provided 70,000 square feet for cell
manufacturing. The Company expects that it will be capable of supporting clinical trials for five different CAR-T and stem cell products simultaneously, or the
ability to produce products to treat approximately 10,000 cancer patients and 10,000 KOA patients per year. To reach this capacity, we plan to hire an additional
60 R&D and Manufacturing personnel by end of 2018.
On January 9, 2017, we announced the commencement of patient enrollment in China for our CALL-1 (“CAR-T against Acute Lymphoblastic
Leukemia”) Phase I clinical trial of CD19 CAR-T therapy utilizing its optimized proprietary C-CAR011 construct for the treatment of patients with relapsed or
refractory (r/r) CD19+ B-cell ALL. The CALL-1 trial began enrollment with more data expected to be available in the first half of 2018. Depending on the Phase I
CALL-1 results, CBMG expects to initiate a larger Phase II clinical trial as soon as possible.
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On February 27, 2017 we announced the Company received a $2.29 million grant from California Institute of Regenerative Medicine (CIRM) to fund our
off-the-shelf AlloJoinTM Allogeneic Stem Cell Therapy for KOA in the United States. We are performing pre-clinical studies at Children’s Hospital Los Angeles
(CHLA) and plan to file AlloJoinTM Phase I clinical trial in the United States. On May 4, 2017, the Company received $1.2 million from the CIRM grant, the first of
four disbursement totaling $2.29 million to fund our off-the-shelf AlloJoin™ Allogeneic Stem Cell Therapy for KOA in the United States.
On March 30, 2017 we announced the completion of our newly expanded 30,000-square foot facility in Huishan High Tech Park in Wuxi, China. 20,000
square feet of the Wuxi facility will be dedicated to advanced stem cell culturing, centralized plasmid and viral vector production, cell banking and development of
reagents.
On April 10, 2017, we announced a strategic research collaboration to co-develop certain high-quality industrial control processes in CAR-T and stem
cell manufacturing with GE Healthcare Life Science. In connection with the collaboration, a joint laboratory within CBMG’s new Shanghai Zhangjiang facility
designed and built to GMP standards will be established and dedicated to the joint research and development of a functionally integrated and automated
immunotherapy cell manufacturing system.
On May 15, 2017, we announced the addition of a new independent Phase I clinical trial of the Company’s ongoing CARD-1 study in patients with
chemorefractory or refractory B cell Non-Hodgkin Lymphoma (NHL). The Company and Shanghai Tongji Hospital (Tongji) are conducting a single arm, non-
randomized study to evaluate the safety and efficacy of C-CAR011 (Anti-CD19 single-chain variable fragment (scFv) (41BB-CD3f)) therapy in relapsed or
refractory B cell NHL patients. The trial will enroll 15 patients comprised of DLBCL, Primary Mediastinal Large B-Cell Lymphoma (PMBCL) and Follicular
Lymphoma (FL).
On June 1, 2017, we announced our Board of Directors approved a new stock repurchase program granting the company authority to repurchase up to
$10 million in common shares (the “2017 Stock Repurchase Program”) through open market purchases pursuant to a plan adopted in accordance with Rule
10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and in accordance with Rule 10b-18 of the Exchange Act. The 2017 Stock
Repurchase Program contemplates repurchase shares of the Company’scommon stock in the open market in accordance with all applicable securities laws and
regulations. From June to December the Company repurchased a total of 426,794 shares at a total cost of $3,977,929, or an average of $9.32/share.
On June 20, 2017, we announced the establishment of an External Advisory Board and the appointment of Michael A. Caligiuri, MD, as Chair of the
External Advisory Board to bring together experts from diverse disciplines to provide knowledge and insight to help CBMG fulfill its mission and build a network
for development opportunities.
On June 26, 2017, we announced the appointment of Dr. Xia Meng as Chief Operating Officer for the Company.
On November 4, 2017, we announced the grand opening of our Zhangjiang facility. On the same day, we announced the signing of a strategic
partnership with Thermo Fisher Scientific (China) Ltd. to build a joint Cell Therapy Technology Innovation and Application Center (Center) at CBMG’s newly
opened Shanghai Zhangjiang facility.
On December 28, 2017, the Company announced the closing of two private placement transactions pursuant to which we sold an aggregate of
1,208,333 shares of the Company’s common stock to select key executives and private investors at $12.00 per share, for total aggregate gross proceeds of
approximately $14.5 Million.
On January 30, 2018 and February 5, 2018, the Company entered into securities purchase agreements with certain investors pursuant to which the
Company agreed to sell, and the investors agreed to purchase from the Company, an aggregate of 1,719,324 shares (the “February 2018 Private Placement”)
of the Company’s common stock, par value $0.001 per share, at $17.80 per share, for total gross proceeds of approximately $30.6 million. The transaction
closed on February 5, 2018. Pursuant to the purchase agreement, the Investors have the right to nominate one director to the board of directors of the Company
to stand for election at the 2018 Annual Meeting of Stockholders. Effective as of the closing of the February 2018 Private Placement, Bosun S. Hau was
appointed as a non-executive Class III director of the Company.
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On February 6, 2018, driven primarily by the Company’s strategy move to expand its business operations in early diagnosis and cancer intervention,
Meng Xia transitioned from the role of Chief Operating Officer to Head of the Early Diagnosis & Intervention for the Company.
On February 15, 2018, the Company obtained a 36 months exclusive option with Augusta University to to negotiate a royalty-bearing, exclusive license
to the patent rights owned by the Augusta University relating to an invention to identify novel alpha fetoprotein specific T-cell receptors (TCR) for a hepatocellular
carcinoma ("HCC") immunotherapy. The Company plan to evaluate the feasibility and opportunities of this novel alpha fetoprotein TCR to redirect T Cells for the
HCC indication.
In the next 12 months, we aim to accomplish the following, though there can be no assurances that we will be able to accomplish any of these goals:
● Bolster R&D resources to fortify our intellectual properties portfolio and scientific development. Continue to develop a competitive immune cell
therapy pipeline for CBMG. Seek opportunities to file new patents in China and potentially the rest of the world;
● Continue to identify and evaluate advanced technologies and seek partnerships to bolster our competitive edge in the cell therapy field in China;
● Submit to the CFDA an IND package for C-CAR011 in treating patients with CD19+ B-cell malignancies.
● Confirm the safety and efficacy profile of C-CAR011 in China in refractory aggressive DLBCL and to initiate a larger Phase II clinical trial whenever
feasible.
● Confirm the safety and efficacy of C-CAR011 in relapsed and refractory (r/r) CD19+ B-cell Acute Lymphoblastic Leukemia (ALL) in China, and / to
prepare for a follow up multicenter phase IIb trial.
● Initiate an investigator sponsored phase I trial of anti-BCMA CART in adults with relapsed/refractory multiple myeloma;
● Implement our GE Joint Technology Laboratory to develop control processes for the manufacturing of CAR-T and Stem Cell Therapies;
● Implement steps to advance our Thermo Fisher joint Cell Therapy Technology Innovation and Application Center;
● Initiate clinical study to support the BLA for Autologous and Allogeneic KOA study in China;
● Complete Chemistry, Manufacturing and Controls (CMC), non-clinical and preclinical study data package to prepare for Allogeneic KOA IND filing in
the United States;
● Initiate clinical study to support the BLA for Allogeneic KOA study in the United States;
● Evaluate new regenerative medicine technology platform for other indications and review recent development in the competitive landscape;
● Evaluate our corporate development strategy on maintaining the CAR-T and regenerative medicine dual technology platform; and
● Evaluate the feasibility and opportunities of novel Alpha Fetoprotein Specific T Cell Receptors (TCR) to redirect T Cells for a HCC Immunotherapy;
and
● Develop the new cancer diagnostics and intervention business; and
● Improve liquidity and fortify our balance sheet by courting institutional investors.
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For the years ended December 31, 2017, 2016 and 2015, we generated $0.3 million, $0.6 million and $2.5 million in technology consulting service
revenue, respectively. We expect our biopharmaceutical business to generate revenues primarily from immune therapy and the development of therapies for the
treatment of KOA in the next three to four years.
Our operating expenses for year ended December 31, 2017 were in line with management’s plans and expectations. We have a decrease in total
operating expenses of approximately $1.1 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016, which is primarily
attributable to an impairment of investment of $4.6 million in 2016.
Corporate Structure
Our current corporate structure is illustrated in the following diagram:
Currently we have the following subsidiaries (including a controlled VIE entity):
Eastbridge Investment Corporation (“Eastbridge Sub”), a Delaware corporation, is a wholly owned subsidiary of the Company.
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Cellular Biomedicine Group VAX, Inc. (“CBMG VAX”), a California corporation, is a wholly owned subsidiary of the Company.
Cellular Biomedicine Group HK Limited, a Hong Kong company limited by shares, is a holding company and wholly owned subsidiary of the Company.
Cellular Biomedicine Group Ltd. (Wuxi), license number 320200400034410 (the “WFOE”) is a wholly foreign-owned entity that is 100% owned by
Cellular Biomedicine Group HK Limited. This entity’s legal name in Chinese translates to “Xi Biman Biological Technology (Wuxi) Co. Ltd.” WFOE controls and
holds ownership rights in the business, assets and operations of Cellular Biomedicine Group Ltd. (Shanghai) (“CBMG Shanghai”) through variable interest entity
(VIE) agreements. We conduct certain biopharmaceutical business activities through WFOE, including lab kit production and research.
Cellular Biomedicine Group Ltd. (Shanghai) license number 310104000501869 (“CBMG Shanghai”), is a PRC domestic corporation, which we control
and hold ownership rights in, through WFOE and the above-mentioned VIE agreements. This entity’s legal name in Chinese translates to “Xi Biman Biotech
(Shanghai) Co., Ltd.” We conduct certain biopharmaceutical business activities through our controlled VIE entity, CBMG Shanghai, including clinical trials and
certain other activities requiring a domestic license in the PRC. Mr. Chen Mingzhe and Mr. Lu Junfeng together are the record holders of all of the outstanding
registered capital of CBMG Shanghai. Mr. Chen and Mr. Lu are also directors of CBMG Shanghai constituting the entire management of the same. Mr. Chen
and Mr. Lu receive no compensation for their roles as managers of CBMG Shanghai.
Beijing Agreen Biotechnology Co., Ltd. is a PRC domestic corporation and wholly owned subsidiary of CBMG Shanghai.
Wuxi Cellular Biopharmaceutical Group Ltd. was established on January 17, 2017 and it is a PRC domestic corporation and wholly owned subsidiary of
CBMG Shanghai.
Shanghai Cellular Biopharmaceutical Group Ltd. was established on January 18, 2017 and it is a PRC domestic corporation and wholly owned
subsidiary of CBMG Shanghai.
Variable Interest Entity (VIE) Agreements
Through our wholly foreign-owned entity and 100% subsidiary, Cellular Biomedicine Group Ltd. (Wuxi), we control and have ownership rights by means
of a series of VIE agreements with CBMG Shanghai. The shareholders of record for CBMG Shanghai were Cao Wei and Chen Mingzhe, who together owned
100% of the equity interests in CBMG Shanghai before October 26, 2016. On October 26, 2016, Cao Wei, Chen Mingzhe and Lu Junfeng entered into an equity
transfer agreement and a supplementary agreement (“Equity Transfer Agreement”), pursuant to which Cao Wei transferred his equity interests in CBMG
Shanghai to Chen Mingzhe and Lu Junfeng. As a result of the transfer, each of Mr. Chen and Mr. Lu now owns a 50% equity interest in CBMG Shanghai. On the
same day, WFOE, CBMG Shanghai, Cao Wei and Chen Mingzhe entered into a termination agreement, pursuant to which, the series of VIE agreements
executed among the WFOE, CBMG Shanghai, Chen Mingzhe and Cao Wei were terminated and a new set of VIE agreements were executed. The following is a
description of each of these VIE agreements:
Exclusive Business Cooperation Agreement. Through the WFOE, we are a party to an exclusive business cooperation agreement dated October 26,
2016 with CBMG Shanghai, which provides that (i) the WFOE shall exclusively provide CBMG Shanghai with complete technical support, business support and
related consulting services; (ii) without prior written consent of the WFOE, CBMG Shanghai may not accept the same or similar consultancy and/or services
from any third party, nor establish any similar cooperation relationship with any third party regarding same matters during the term of the agreement; (iii) CBMG
Shanghai shall pay the WFOE service fees as calculated based on the time of service rendered by the WFOE multiplying the corresponding rate, plus an
adjusted amount decided by the board of the WFOE; and (iv) CBMG Shanghai grants to the WFOE an irrevocable and exclusive option to purchase, at its sole
discretion, any or all of CBMG Shanghai’s assets at the lowest purchase price permissible under PRC laws. The term of the agreement is 10 years, provided
however the agreement may extended at the option of the WFOE. Since this agreement permits the WFOE to determine the service fee at its sole discretion,
the agreement in effect provides the WFOE with rights to all earnings of the VIE.
Loan Agreement. Through the WFOE, we are a party to a loan agreement with CBMG Shanghai, Lu Junfeng and Chen Mingzhe dated October 26,
2016, in accordance with which the WFOE agreed to provide an interest-free loan to CBMG Shanghai. The term of the loan is 10 years, which may be
extended upon written consent of the parties. The method of repayment of CBMG Shanghai shall be at the sole discretion of the WFOE, including but not
limited to an acquisition of CBMG Shanghai in satisfaction of its loan obligations.
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Exclusive Option Agreement with Lu Junfeng . Through the WFOE, we are a party to an option agreement with CBMG Shanghai and Lu Junfeng dated
October 26, 2016, in accordance with which: (i) Lu Junfeng irrevocably granted the WFOE an irrevocable and exclusive right to purchase, or designate another
person to purchase the entire equity interest in CBMG Shanghai as then held by him, at an aggregate purchase price to be determined; and (ii) any proceeds
obtained by Lu Junfeng through the above equity transfer in CBMG Shanghai shall be used for the payment of the loan provided by the WFOE under the
aforementioned Loan Agreement.
Exclusive Option Agreement with Chen Mingzhe . Through the WFOE, we are a party to an exclusive option agreement with CBMG Shanghai and Chen
Mingzhe dated October 26, 2016, under which: (i) Chen Mingzhe irrevocably granted the WFOE an irrevocable and exclusive right to purchase, or designate
another person to purchase the entire equity interest in CBMG Shanghai for an aggregate purchase price to be determined; and (ii) any proceeds obtained by
Chen Mingzhe through the above equity transfer in CBMG Shanghai shall be used for the payment of the loan provided by the WFOE under the aforementioned
Loan Agreement.
Power of Attorney from Lu Junfeng. Through the WFOE we are the recipient of a power of attorney executed by Lu Junfeng on October 26, 2016, in
accordance with which Lu Junfeng authorized the WFOE to act on his behalf as his exclusive agent with respect to all matters concerning his equity interest in
CBMG Shanghai, including without limitation to attending the shareholder meetings of CBMG Shanghai, exercising voting rights and designating and appointing
senior executives of CBMG Shanghai.
Power of Attorney from Chen Mingzhe. Through the WFOE we are the recipient of a power of attorney executed by Chen Mingzhe on October 26,
2016, in accordance with which Chen Mingzhe authorized the WFOE to act on his behalf as his exclusive agent with respect to all matters concerning his equity
interest in CBMG Shanghai, including without limitation to attending the shareholders meetings of CBMG Shanghai, exercising voting rights and designating and
appointing senior executives of CBMG Shanghai.
Equity Interest Pledge Agreement with Lu Junfeng . Through the WFOE, we are a party to an equity interest pledge agreement with CBMG Shanghai
and Lu Junfeng dated October 26, 2016, in accordance with which: (i) Lu Junfeng pledged to the WFOE the entire equity interest he holds in CBMG Shanghai
as security for payment of the consulting and service fees by CBMG Shanghai under the Exclusive Business Cooperation Agreement; (ii) Lu Junfeng and CBMG
Shanghai submitted all necessary documents to ensure the registration of the Pledge of the Equity Interest with the State Administration for Industry and
Commerce (“SAIC”), and the pledge became effective on November 22, 2016; (iii) on the occurrence of any event of default, unless it has been successfully
resolved within 20 days after the delivery of a rectification notice by the WFOE, the WFOE may exercise its pledge rights at any time by a written notice to Lu
Junfeng.
Equity Interest Pledge Agreement with Chen Mingzhe . Through the WFOE we are a party to an equity interest pledge agreement with CBMG Shanghai
and Chen Mingzhe dated October 26, 2016, in accordance with which: (i) Chen Mingzhe pledged to the WFOE the entire equity interest he holds in CBMG
Shanghai as security for payment of the consulting and service fees by CBMG Shanghai under the Exclusive Business Cooperation Agreement; (ii) Chen
Mingzhe and CBMG Shanghai submitted all necessary documents to ensure the registration of the Pledge of the Equity Interest with SAIC, and the
pledge became effective on November 22, 2016; (iii) on the occurrence of any event of default, unless it has been successfully resolved within 20 days after the
delivery of a rectification notice by the WFOE, the WFOE may exercise its pledge rights at any time by a written notice to Chen Mingzhe.
Our relationship with our controlled VIE entity, CBMG Shanghai, through the VIE agreements, is subject to various operational and legal
risks. Management believes that Mr. Chen and Mr. Lu, as record holders of the VIE’s registered capital, have no interest in acting contrary to the VIE
agreements. However, if Mr. Chen and Lu as shareholders of the VIE entity were to reduce or eliminate their ownership of the registered capital of the VIE
entity, their interests may diverge from that of CBMG and they may seek to act in a manner contrary to the VIE agreements (for example by controlling the VIE
entity in such a way that is inconsistent with the directives of CBMG management and the board; or causing non-payment by the VIE entity of services fees). If
such circumstances were to occur the WFOE would have to assert control rights through the powers of attorney and other VIE agreements, which would require
legal action through the PRC judicial system. While we believe the VIE agreements are legally enforceable in the PRC, there is a risk that enforcement of these
agreements may involve more extensive procedures and costs to enforce, in comparison to direct equity ownership of the VIE entity. We believe based on the
advice of local counsel that the VIE agreements are valid and in compliance with PRC laws presently in effect. Notwithstanding the foregoing, if the applicable
PRC laws were to change or are interpreted by authorities in the future in a manner which challenges or renders the VIE agreements ineffective, the WFOE’s
ability to control and obtain all benefits (economic or otherwise) of ownership of the VIE entity could be impaired or eliminated. In the event of such future
changes or new interpretations of PRC law, in an effort to substantially preserve our rights we may have to either amend our VIE agreements or enter into
alternative arrangements which comply with PRC laws as interpreted and then in effect.
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For further discussion of risks associated with the above, please see the section below titled “Risks Related to Our Structure.”
BIOPHARMACEUTICAL BUSINESS
Our biopharmaceutical business was founded in 2009 as a newly formed specialty biomedicine company by a team of seasoned Chinese-American
executives, scientists and doctors. In 2010, we established a facility designed and built to GMP standards in Wuxi, and in 2012 we established a U.S. Food and
Drug Administration (“FDA”) GMP standard protocol-compliant manufacturing facility in Shanghai. In October 2015, we opened a facility designed and built to
GMP standards in Beijing. In November 2017, we announced the grand opening of our Zhangjiang facility in Shanghai, of which 40,000 square feet was
designed and built to GMP standards and dedicated to advanced cell manufacturing. Our focus has been to serve the rapidly growing health care market in
China by marketing and commercializing stem cell and immune cell therapeutics, related tools and products from our patent-protected homegrown and acquired
cell technology, as well as by utilizing exclusively in-licensed and other acquired intellectual properties.
Our current treatment focal points are cancer and other degenerative diseases such as KOA.
Cancer. In the cancer field, with the recent build-up of multiple cancer therapeutic technologies, we have prioritized our clinical efforts on CAR-T. We are
not actively pursuing the fragmented Tcm technical services opportunities. On November 29, 2016, we announced the approval and commencement of patient
enrollment in China for its CARD-1 (“CAR-T Against DLBCL”) Phase I clinical trial utilizing its optimized proprietary C-CAR011 construct of CD19 chimeric
antigen receptor T-cell (CAR-T) therapy for the treatment of patients with refractory Diffuse Large B-cell Lymphoma (DLBCL). The CARD-1 trial has begun
enrollment with final data expected to be available in the second half of 2018. On January 9, 2017 we announced the approval and commencement of patient
enrollment in China for its CALL-1 (“CAR-T against Acute Lymphoblastic Leukemia”) Phase I clinical trial utilizing its optimized proprietary C-CAR011 construct
of CD19 chimeric antigen receptor T-cell (“CAR-T”) therapy for the treatment of patients with relapsed or refractory (r/r) CD19+ B-cell Acute Lymphoblastic
Leukemia (“ALL”). The CALL-1 trial has begun enrollment with final data expected to be available in the second half of 2018. Depending on the Phase I CARD-1
and CALL-1 results, we expect to initiate larger trials to confirm the safety and efficacy profile and support BLA submission as soon as practicable.
On May 15, 2017, we announced the addition of a new independent Phase I clinical trial of the Company’s ongoing CARD-1 study in patients with
chemorefractory and aggressive DLBCL. Recruitment has started on patients comprised of DLBCL, Primary Mediastinal Large B-Cell Lymphoma (PMBCL) and
Follicular Lymphoma (FL). Final data for this single arm, non-randomized study to evaluate the safety and efficacy of C- CAR011 (Anti-CD19 single-chain
variable fragment (scFv) (41BB-CD3f)) therapy in relapsed or refractory B cell Non-Hodgkin Lymphoma (NHL) is expected in the first half of 2019.
KOA. In 2013, we completed a Phase I/IIa clinical study, in China, for our Knee Osteoarthritis (“KOA”) therapy named Re-Join®. The trial tested the
safety and efficacy of intra-articular injections of autologous haMPCs in order to reduce inflammation and repair damaged joint cartilage. The 6-month follow-up
clinical data showed Re-Join® therapy to be both safe and effective.
In Q2 of 2014, we completed patient enrollment for the Phase IIb clinical trial of Re-Join® for KOA. The multi-center study enrolled 53 patients to
participate in a randomized, single blind trial. We published 48 weeks follow-up data of Phase I/IIa on December 5, 2014. The 48 week data indicated that
patients have reported a decrease in pain and a significant improvement in mobility and flexibility, while the clinical data shows our Re-Join® regenerative
medicine treatment to be safe. We announced the interim 24 week results for Re-Join® on March 25, 2015 and released positive Phase IIb 48 week follow-up
data in January 2016, which shows the primary and secondary endpoints of Re-Join® therapy group having all improved significantly compared to their baseline,
which has confirmed some of the Company’s Phase I/IIa results. Our Re-Join® human adipose-derived mesenchymal progenitor cell (haMPC) therapy for KOA
is an interventional therapy using proprietary device, process, culture and medium:
● Obtain adipose (fat) tissue from the patient using our CFDA approved medical device, the A-Stromal™ Kit;
● Expand haMPCs using our proprietary culture medium (serum-free and antibiotics-free); and
● Formulated for ReJoin therapy using our proprietary formulation.
Our process is distinguishable from sole Stromal Vascular Fraction (SVF) therapy. The immunophenotype of our haMPCs exhibited multiple biomarkers
such as CD29+, CD73+, CD90+, CD49d+, HLA-I+, HLA-DR-, Actin-, CD14-, CD34-, and CD45-. In contrast, SVF is merely a heterogeneous fraction including
preadipocytes, endothelial cells, smooth muscle cells, pericytes, macrophages, fibroblasts, and adipose-derived stem cells (ASCs).
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In January 2016, we launched the Allogeneic KOA Phase I Trial in China to evaluate the safety and efficacy of AlloJoin™, an off-the shelf allogeneic
adipose derived progenitor cell (haMPC) therapy for the treatment of KOA. On August 5, 2016 we completed patient treatment for the Allogeneic KOA Phase I
trial, and on December 9, 2016 we announced interim 3-month safety data from the Allogenic KOA Phase I Trial in China. The interim analysis of the trial has
preliminarily demonstrated a safety and tolerability profile of AlloJoin™ in the three doses tested, and no serious adverse events (SAE) have been observed. The
trial has been completed in 2017.
In January 2015, we initiated patient recruitment in a phase II clinical study, in China, of ReJoin (human adipose derived mesenchymal progenitor cell or
“haMPC”) in Cartilage Damaged (“CD”) patients resulting from osteoarthritis (“OA”) or sports injury, in further support of KOA indication. The study is based on
the same technology that has shown significant efficacy in the treatment of Knee Osteoarthritis (“KOA”), but requires two arthroscopic examinations and the use
of magnetic resonance imaging (“MRI”) to further demonstrate the regenerative efficacy of ReJoin. Upon further review of the protocol and the difficulty of getting
patients back for a second arthroscopic examination, we determined to terminate the study.
The unique lines of adult adipose-derived stem cells and the immune cell therapies enable us to create multiple cell formulations in treating specific
medical conditions and diseases, as well as applying single cell types in a specific treatment protocol. The quality management systems of CBMG Shanghai and
CBMG Wuxi were issued a Certificate of ISO-9001:2008 by SGS /ANAB (ANSI-ASQ National Accreditation Board). Our facility in Shanghai was issued a
Certificate of Compliance by ENV Services, Inc., an ISO Inspection Service Provider that (i) its rooms 1-7, 10 are certified to ISO Class 7 per ISO-14644 in
accordance with cGMP; (ii) its biological safety cabinets are certified per NSF/ANSI 49 and to ISO Class 5;and (iii) its instrumentation calibration has been
certified to perform in accordance with ANSI/NCSL Z-540-1 and document in accordance with 10CFR21.Our facility in Shanghai was issued a Testing Report by
Shanghai Food and Drug Packaging Material Control Center concluding that some testing items of the cleanrooms are in compliance with the Good
Manufacturing Practice for Drugs (2010 Revision) of China. The cleanrooms in Beijing are certified to meet the standard of CNAS L1669; and Wuxi has been
certified to meet the SHPMCC standard.
In addition to standard protocols, we use proprietary processes and procedures for manufacturing our cell lines, comprised of:
● Banking processes that ensure cell preservation and viability;
● DNA identification for stem cell ownership; and
● Bio-safety testing at independently certified laboratories.
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Recent Developments in Cancer Cell Therapy
According to the U.S. National Cancer Institute’s 2013 cancer topics research update on CAR-T-Cells, excitement is growing for immunotherapy—
therapies that harness the power of a patient’s immune system to combat their disease, or what some in the research community are calling the “fifth pillar” of
cancer treatment.
One approach to immunotherapy involves engineering patients’ own immune cells to recognize and attack their tumors. And although this approach,
called adoptive cell transfer (ACT), has been restricted to small clinical trials so far, treatments using these engineered immune cells have generated some
remarkable responses in patients with advanced cancer. For example, in several early-stage trials testing ACT in patients with ALL who had few if any
remaining treatment options, many patients’ cancers have disappeared entirely. Several of these patients have remained cancer free for extended periods.
Equally promising results have been reported in several small clinical trials involving patients with lymphoma. Although the lead investigators cautioned
that much more research is needed, the results from the trials performed thus far indicate that researchers can successfully alter patients’ T cells so that they
attack their cancer cells. As an example, we look to Spectrum Pharmaceutical’s Folotyn approved in September 2009 for treatment of R/R peripheral T-cell
lymphoma with approval supported by a single arm trial observing an overall response rate of 27% and median duration of response of 9.4 months. In addition,
CTI Therapeutics Pixuvri received a complete response letter in April 2010 in R/R aggressive NHL in which a 37% overall response rate and 5.5 month duration
of response was observed.
ACT’s building blocks are T cells, a type of immune cell collected from the patient’s own blood. After collection, the T cells are genetically engineered to
produce special receptors on their surface called chimeric antigen receptors (CARs). CARs are proteins that allow the T cells to recognize a specific protein
(antigen) on tumor cells. These engineered CAR T cells are then grown in the laboratory until they number in the billions. The expanded population of CAR T
cells is then infused into the patient. After the infusion, if all goes as planned, the T cells multiply in the patient’s body and, with guidance from their engineered
receptor, recognize and kill cancer cells that harbor the antigen on their surfaces. This process builds on a similar form of ACT pioneered from NCI’s Surgery
Branch for patients with advanced melanoma. According to www.cancer.gov/.../research-updates/2013/CAR-T-Cells, in 2013 NCI’s Pediatric Oncology Branch
commented that the CAR T cells are much more potent than anything they can achieve with other immune-based treatments being studied. Although
investigators working in this field caution that there is still much to learn about CAR T-cell therapy, the early results from trials like these have generated
considerable optimism. Researchers opined that CAR T-cell therapy eventually may become a standard therapy for some B-cell malignancies like ALL and
chronic lymphocytic leukemia.
So far, chimeric antigen receptor T cell therapy such as CD19 CAR-T, have been tested in several hematological indications on patients that are
refractory/relapsing to chemotherapy, and many of them have relapsed after stem cell transplantation. All of these patients had very limited treatment option
prior to CAR-T therapy. CAR-T has shown positive clinical efficacy in many of these patients. Some of have them lived for years post CAR-T treatment.
Management believes the remaining risk in monetizing cancer immune cell therapies is concentrated in late stage clinical studies, speed-to-approval,
manufacturing and process optimization.
On July 2016, Juno Therapeutics, Inc. reported the death of patients enrolled in the U.S. Phase II clinical trial of JCAR015 for the treatment of relapsed
or refractory B cell acute lymphoblastic leukemia (B-ALL). The US FDA put the trial on hold and lifted the hold within a week after Juno provided satisfactory
explanation and solution. Juno believes that the patient deaths were caused by the use of Fludarabine preconditioning and they will use only cyclophosphamide
pre-conditioning in the future enrollment. The trial was halted in November of 2016 after two more deaths occurred after the trial resumed. The Company
believes that its product and study are distinguishable from Juno Therapeutics and plans to continue to monitor any toxicities associated with the study.
On August 2017, the U.S. FDA approved Novartis’ CAR-T therapy on relapsed or refractory (r/r) acute lymphoblastic leukemia (ALL), the most common
cancer in Children. Current treatments show a rate of 80% remission using intensive chemotherapy. However, there are almost no conventional treatments to
help patients who have relapsed. Novartis’ Tisagenlecleucel (Kymriah), a CD19-targeted CAR-T therapy for children and adolescents with r/r ALL has shown
results of complete and long lasting remission, which led the FDA to approve the drug funded by Novartis and the first CAR-T therapy.
On October 2017, the U.S. FDA approved Kite Pharmaceuticals’ (Gilead) CAR-T therapy for diffuse large B-cell lymphoma (DLBCL), the most common
type of non- Hodgkin lymphoma (NHL) in adults. The initial results of axicabtagene ciloleucel (Yescarta), Kite Pharma’s drug for non-Hodgkin’s lymphoma,
shows four out of seven patients treated achieved complete remission, which continued after 12 months. The prognosis of high-grade chemo refractory NHL is
dismal with a medium survival time of a few weeks. Yescarta is a therapy for patients who have not responded to or who have relapsed after at least two other
kinds of treatment.
In December 2017, the Chinese government issued trial guidelines concerning development and testing of cell therapy products in China. Although
these trial guidelines are not yet codified as mandatory regulation, we believe they provide a measure of clarity and a preliminary regulatory pathway for our cell
therapy operations in a still uncertain regulatory environment.
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Market for Cell-Based Therapies
In 2013, U.S. sales of products which contain stem cells or progenitor cells or which are used to concentrate autologous blood, bone marrow or adipose
tissues to yield concentrations of stem cells for therapeutic use were, conservatively, valued at $236 million at the hospital level. It is estimated that the
orthopedics industry used approximately 92% of the stem cell products.
The forecast is that in the United States, shipments of treatments with stem cells or instruments which concentrate stem cell preparations for injection
into painful joints will fuel an overall increase in the use of stem cell based treatments and an increase to $5.7 billion in 2020, with key growth areas being Spinal
Fusion, Sports Medicine and Osteoarthritis of the joints. According to Centers for Disease Control and Prevention. Prevalence of doctor-diagnosed arthritis and
arthritis-attributable activity limitation United States. 2010-2012, Osteoarthritis (OA) is a chronic disease that is characterized by degeneration of the articular
cartilage, hyperosteogeny, and ultimately, joint destruction that can affect all of the joints. According to Dillon CF, Rasch EK, Gu Q et al. Prevalence of knee
osteoarthritis in the United States: Arthritis Data from the Third National Health and Nutrition Examination Survey 1991-94. J Rheumatol. 2006, the incidence of
OA is 50% among people over age 60 and 90% among people over age 65. KOA accounts for the majority of total OA conditions and in adults, OA is the second
leading cause of work disability and the disability incidence is high (53%). The costs of OA management have grown exponentially over recent decades,
accounting for up to 1% to 2.5% of the gross national product of countries with aging populations, including the U.S., Canada, the UK, France, and Australia.
According to the American Academy of Orthopedic Surgeons (AAOS), the only pharmacologic therapies recommended for OA symptom management are non-
steroidal anti-inflammatory drugs (NSAIDs) and tramadol (for patients with symptomatic osteoarthritis). Moreover, there is no approved disease modification
therapy for OA in the world. Disease progression is a leading cause of hospitalization and ultimately requires joint replacement surgery. In 2009, the U.S. spent
over $42 billion on replacement surgery for hip and knee joints alone. International regulatory guidelines on clinical investigation of medicinal products used in the
treatment of OA were updated in 2015, and clinical benefits (or trial outcomes) of a disease modification therapy for KOA has been well defined and
recommended. Medicinal products used in the treatment of osteoarthritis need to provide both a symptom relief effect for at least 6 months and a structure
modification effect to slow cartilage degradation by at least 12 months. Symptom relief is generally measured by a composite questionnaire Western Ontario and
McMaster Universities Osteoarthritis Index (WOMAC) score, and structure modification is measured by MRI, or radiographic image as accepted by international
communities. The Company uses the WOMAC as primary end point to demonstrate symptom relief, and MRI to assess structure and regeneration benefits as a
secondary endpoint.
According to the Foundation for the National Institutes of Health, there are 27 million Americans with Osteoarthritis (OA), and symptomatic Knee
Osteoarthritis (KOA) occurs in 13% of persons aged 60 and older. The International Journal of Rheumatic Diseases, 2011 reports that approximately 57 million
people in China suffer from KOA. Currently no treatment exists that can effectively preserve knee joint cartilage or slow the progression of KOA. Current
common drug-based methods of management, including anti-inflammatory medications (NSAIDs), only relieve symptoms and carry the risk of side effects.
Patients with KOA suffer from compromised mobility, leading to sedentary lifestyles; doubling the risk of cardiovascular diseases, diabetes, and obesity; and
increasing the risk of all causes of mortality, colon cancer, high blood pressure, osteoporosis, lipid disorders, depression and anxiety. According to the
Epidemiology of Rheumatic Disease (Silman AJ, Hochberg MC. Oxford Univ. Press, 1993:257), 53% of patients with KOA will eventually become disabled.
The number of cell therapy companies that are currently in Phase 2 and Phase 3 trials has been gathering momentum, and we anticipate that new
cellular therapy products will appear on the market within the next several years.
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Our Strategy
The majority of our biopharmaceutical business is in the development stage. We intend to concentrate our business on cell therapies and in the near-
term, carrying our KOA stem cell therapy and cancer immune cell therapies to commercialization.
We are developing our business in cell therapeutics and capitalizing on the increasing importance and promise that adult stem cells have in regenerative
medicine. Our most advanced candidate involves adipose-derived mesenchymal stem cells to treat KOA. Based on current estimates, we expect our
biopharmaceutical business to generate revenues primarily through the development of therapies for the treatment of KOA within the next three to four years.
Presently we have two completed KOA cell therapy clinical studies in China, a Phase IIb autologous study and a Phase I allogeneic study. If and when
either therapy obtains regulatory approval in the PRC, we will be able to market and offer the therapy for clinical use in China.
Our strategy is to develop safe and effective cellular medicine therapies for indications that represent a large unmet need in China, based on
technologies developed both in-house and obtained through acquisition, licensing and collaboration arrangements with other companies. Our near term
objective is to pursue successful clinical trials in China for our KOA application. We intend to utilize our comprehensive cell platform to support multiple cell lines
to pursue multiple therapies, both allogeneic and autologous. We intend to apply U.S. Standard Operating Procedures ("SOPs") and protocols while complying
with Chinese regulations, while owning, developing and executing our own clinical trial protocols. We plan to establish domestic and international joint ventures
or partnerships to set up cell laboratories and/or research facilities, acquire technology or in-license technology from outside of China, and build affiliations with
hospitals, to develop a commercialization path for our therapies, once approved. We intend to use our first-mover advantage in China, against a backdrop of
enhanced regulation by the central government, to differentiate ourselves from the competition and establish a leading position in the China cell therapeutic
market. We also intend to out-license our technologies to interested parties and are exploring the feasibility of a U.S. allogeneic KOA clinical study with the
FDA.
With the AG acquisition we intend to monetize AG’s U.S. and Chinese intellectual property for immune cell therapy preparation methodologies and
patient immunity assessment by engaging with prominent hospitals to conduct pre-clinical and clinical studies in specific cancer indications. The T Cell clonality
analysis technology patent, together with AG’s other know-how for immunity analysis, will enable the Company to establish an immunoassay platform that is
crucial for immunity evaluation of patients with immune disorders as well as cancerous diseases that are undergoing therapy. We will continue to seek to
empower hospitals' immune cell cancer therapy development programs that help patients improve their quality of life and improve their survival rate.
We believe that few competitors in China are as well-equipped as we are in the clinical trial development, diversified U.S. FDA protocol compliant
manufacturing facilities, regulatory compliance and policy making participation, as well as a long-term presence in the U.S. with U.S.-based management and
investor base.
We intend to continue our business development efforts by adding other proven domestic and international biotechnology partners to monetize the China
health care market.
In order to expedite fulfillment of patient treatment CBMG has been actively developing technologies and products with a strong intellectual properties
protection, including haMPC, derived from fat tissue, for the treatment of KOA and other indications. CBMG’s acquisition of AG provides an enlarged opportunity
to expand the application of its cancer therapy-enabling technologies and to initiate clinical trials with leading cancer hospitals.
CBMG's proprietary and patent-protected production processes and clinical protocols enable us to produce raw material, manufacture cells, and conduct
cell banking and distribution. These protocols include medical assessment to qualify each patient for treatment, evaluation of each patient before and after a
specific therapy, cell transplantation methodologies including dosage, frequency and the use of adjunct therapies, potential adverse effects and their proper
management. Applying our proprietary intellectual property, we will be able to customize specialize formulations to address complex diseases and debilitating
conditions.
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We operate our manufacturing facilities under the design of the standard good manufacturing practice ("GMP") conditions in the ISO accredited
laboratories standard. We employ an institutionalized and proprietary process and quality management system to optimize reproducibility and to hone our
efficiency. Three facilities designed and built to GMP in Beijing, Shanghai and Wuxi, China meet international standards. With our integrated Plasmid, Viral
Vectors, and CAR-T cells Chemistry, Manufacturing, and Controls processes as well as planned capacity expansion, we are highly distinguishable with other
companies in the cellular medicine space.
In total, our facilities have approximately 70,000 square feet of space and are expected to have a capacity to provide therapies that can treat
approximately 10,000 cancer patients and 10,000 patients per year.
Most importantly, our most experienced team members have more than 20 years of relevant experience in China, European Union, and the United
States. All of these factors make CBMG a high quality cell products manufacturer in China.
Our Targeted Indications and Potential Therapies
Knee Osteoarthritis (KOA)
We are currently pursuing two primary therapies for the treatment of KOA: our Re-Join® therapy and our AlloJoin TM therapy.
We completed the Phase I/IIa clinical trial for the treatment of KOA. The trial tested the safety and efficacy of intra-articular injections of autologous
haMPCs in order to reduce inflammation and repair damaged joint cartilage. The 6-month follow-up clinical data showed Re-Join® therapy to be both safe and
effective.
In the second quarter of 2014, we completed patient enrollment for the Phase IIb clinical trial of Re-Join® for KOA. The multi-center study has enrolled
53 patients to participate in a randomized, single blind trial. We published 48 weeks follow-up data of Phase I/IIa on December 5, 2014. The 48 weeks data
indicated that patients have reported a decrease in pain and a significant improvement in mobility and flexibility, while the clinical data shows our Re-Join®
regenerative medicine treatment to be safe. We announced positive Phase IIb 48-week follow-up data in January 2016, with statistical significant evidence that
Re-Join® enhanced cartilage regeneration, which concluded the planned phase IIb trial.
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In January 2016, we launched the Allogeneic KOA Phase I Trial in China to evaluate the safety and efficacy of AlloJoin™, an off-the shelf haMPC
therapy for the treatment of KOA. On August 5, 2016 we completed patient treatment for the Allogeneic KOA Phase I trial. On August 5, 2016 we completed
patient treatment for the Allogenic KOA Phase I Trial, and on December 9, 2016, we announced interim 3-month safety data from the Allogenic KOA Phase I
Trial in China. The interim analysis of the trial has preliminarily demonstrated a safety and tolerability profile of AlloJoin™ in the three doses tested, and no SAEs
have been observed. The trial has been completed in 2017. We plan to release the data in the second quarter of 2018.
Osteoarthritis is a degenerative disease of the joints. KOA is one of the most common types of osteoarthritis. Pathological manifestation of osteoarthritis
is primarily local inflammation caused by immune response and subsequent damage of joints. Restoration of immune response and joint tissues are the objective
of therapies.
According to International Journal of Rheumatic Diseases, 2011 , 53% of KOA patients will degenerate to the point of disability. Conventional treatment
usually involves invasive surgery with painful recovery and physical therapy. As drug-based methods of management are ineffective, the same journal estimates
that some 1.5 million patients with this disability will degenerate to the point of requiring artificial joint replacement surgery every year. However, only 40,000
patients will actually be able to undergo replacement surgery, leaving the majority of patients to suffer from a life-long disability due to lack of effective treatment.
Adult mesenchymal stem cells can currently be isolated from a variety of adult human sources, such as liver, bone marrow, and adipose (fat) tissue. We
believe the advantages in using adipose tissue (as opposed to bone marrow or blood) are that it is one of the richest sources of pluripotent cells in the body, the
easy and repeatable access to fat via liposuction, and the simple cell isolation procedures that can begin to take place even on-site with minor equipment needs.
The procedure we are testing for KOA involves extracting a very small amount of fat using a minimally invasive extraction process which takes up to 20 minutes,
and leaves no scarring. The haMPC cells are then processed and isolated on site, and injected intra articularly into the knee joint with ultrasound guidance.
These haMPC cells are capable of differentiating into bone, cartilage, tendon, skeletal muscle, and fat under the right conditions. As such, haMPCs are
an attractive focus for medical research and clinical development. Importantly, we believe both allogeneic and autologously sourced haMPCs may be used in the
treatment of disease. Numerous studies have provided preclinical data that support the safety and efficacy of allogeneic and autologously derived haMPC,
offering a choice for those where factors such as donor age and health are an issue.
Additionally, certain disease treatment plans call for an initial infusion of these cells in the form of SVF, an initial form of cell isolation that can be
completed and injected within ninety minutes of receiving lipoaspirate. The therapeutic potential conferred by the cocktail of ingredients present in the SVF is
also evident, as it is a rich source for preadipocytes, mesenchymal stem cells, endothelial progenitor cells, T regulatory cells and anti-inflammatory
macrophages.
haMPCs are currently being considered as a new and effective treatment for osteoarthritis, with a huge potential market. Osteoarthritis is one of the ten
most disabling diseases in developed countries. Worldwide estimates are that 9.6% of men and 18.0% of women aged over 60 years have symptomatic
osteoarthritis. It is estimated that the global OA therapeutics market was worth $4.4 billion in 2010 and is forecast to grow at a compound annual growth rate
(“CAGR”) of 3.8% to reach $5.9 billion by 2018.
In order to bring haMPC-based KOA therapy to market, our market strategy is to: (a) establish regional laboratories that comply with cGMP standards in
Shanghai and Beijing that meet Chinese regulatory approval; and (b) file joint applications with Class AAA hospitals to use haMPCs to treat KOA in a clinical trial
setting.
Our competitors are pursuing treatments for osteoarthritis with knee cartilage implants. However, unlike their approach, our KOA therapy is not surgically
invasive – it uses a small amount (30ml) of adipose tissue obtained via liposuction from the patient, which is cultured and re-injected into the patient. The
injections are designed to induce the body’s secretion of growth factors promoting immune response and regulation, and regrowth of cartilage. The down-
regulation of the patient’s immune response is aimed at reducing and controlling inflammation which is a central cause of KOA.
We believe our proprietary method, subsequent haMPC proliferation and processing know-how will enable haMPC therapy to be a low cost and relatively
safe and effective treatment for KOA. Additionally, banked haMPCs can continue to be stored for additional use in the future.
Immuno-oncology (I/o)
We continue to fortify our cancer breakthrough technology platform with I/o, programmed cell death and vaccine technology.
Our CAR-T platform is built on lenti-virial vector and second-generation CAR design, which is used by most of the current trials and studies. We
rigorously select the patient population for each asset and indication to allow the optimal path forward for regulatory approval. We also fully integrate the state of
art translational medicine effort into each clinical study to aid in dose selection, to confirm the mechanism of action and proof of concept, and to identify the
optimal targeting patient population whenever appropriate. We plan to continue to grow our translational medicine team and engage key opinion leaders to meet
the demand.
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Solid tumors pose more challenges than hematological cancers. The patients are more heterogeneous, making it difficult to have one drug to work
effectively in the majority of the patients in any cancer indication. The duration of response is most likely shorter and patients are likely to relapse even after
initial positive clinical response. We will continue our effort in developing cell based therapies to target both hematological cancers and solid tumors.
Tumor Cell Specific Dendritic Cells (TC-DC)
Recent scientific findings indicate the presence of special cells in tumors that are responsible for cancer metastases and relapse. Referred to as “cancer
stem cells”, these cells make up only a small portion of the tumor mass. The central concept behind TC-DC therapy is to immunize against these cells. TC-DC
therapy takes a sample of the patient’s own purified and irradiated cancer cells and combines them with specialized immune cells, thereby ‘educating’ the
immune cells to destroy the cancer stem cells from which tumors arise. We believe the selective targeting of cells that drive tumor growth would allow for
effective cancer treatment without the risks and side effects of current therapies that also destroy healthy cells in the body.
Our strategy is, through the acquisition of AG and the technologies and pre-clinical and clinical data of University of the South Florida and PLAGH, to
become an immune cell business leader in the China cancer therapy market and specialty pharmaceutical market by utilizing CBMG’s attractiveness as a
Nasdaq listed company to consolidate key China immune cell technology leaders with fortified intellectual property and ramp up revenue with first mover’s
advantage in a safe and efficient manner. The Company plans to accelerate cancer trials in China by using the knowledge and experience gained from the
Company’s ongoing KOA trials and the recent, CAR-T and Tcm technologies. However, it remains unclear if any of our clinical trials will qualify for U.S.FDA-liked
Fast Track designation as maintenance therapy in subjects with advanced cancer who have limited options following surgery and front-line platinum/taxane
chemotherapy to improve their progression-free survival. By applying U.S. SOP and protocols and following authorized treatment plans in China, we believe we
are differentiated from our competition as we believe we have first mover’s advantage and a fortified barrier to entry. In addition, encouraged by the 2017 CIRM
grant of $2.29 million for our preclinical trial to replicate and validate the manufacturing process and control system at the cGMP facility located at Children’s
Hospital Los Angeles to support the filing of an IND with the FDA, we have begun to review the feasibility of performing synergistic U.S. KOA clinical trial.
Intellectual Property
We have built our intellectual property portfolio with a view towards protecting our freedom of operation in China within our specialties in the cellular
biopharmaceutical field. Our portfolio contains patents, trade secrets, and know-how.
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The production of stem cells for therapeutic use requires the ability to purify and isolate these cells to an extremely high level of purity. Accordingly, our
portfolio is geared toward protecting our proprietary process of purification, cell processing and related steps in stem cell production. The combination of our
patents and trade secrets protects various aspects of our cell line production methods and methods of use, including methods of purification, extraction, freezing,
preservation, processing and use in treatment.
For our haMPC therapy:
● We believe our intellectual property portfolio for haMPC is well-built and abundant. It covers aspects of adipose stem cell medicine production,
including acquisition of human adipose tissue, preservation, and storage, tissue, processing, stem cell purification, expansion, and banking,
formulation for administration, and administration methods.
● Our portfolio also includes adipose derived cellular medicine formulations and their applications in the potential treatment of degenerative diseases
and autoimmune diseases, including osteoarthritis, rheumatoid arthritis, as well as potential applications to anti-aging.
● Our haMPC intellectual property portfolio:
° provides coverage of all steps in the production process;
° enables achievement of high yields of Stromal Vascular Fraction (SVF), i.e. stem cells derived from adipose tissue extracted by liposuction;
° makes adipose tissue acquisition convenient and useful for purposes of cell banking; and
° employs preservation techniques enabling long distance shipment of finished cell medicine products.
For our CAR-T and Tcm cancer immune cell therapy:
● Our recent amalgamation of technologies from AG and PLAGH in the cancer cell therapy is comprehensive and well-rounded. It comprises of T cell
clonality, Chimeric Antigen Receptor T cell (CAR-T) therapy, its recombinant expression vector CD19, CD20, CD30 and Human Epidermal Growth
Factor Receptor's (EGFR or HER1) Immuno-Oncology patents applications, several preliminary clinical studies of various CAR-T constructs
targeting CD19-positive acute lymphoblastic leukemia, CD20-positive lymphoma, CD30-positive Hodgkin's lymphoma and EGFR-HER1-positive
advanced lung cancer, and Phase I/II clinical data of the aforementioned therapies and manufacturing knowledge.
In addition, our intellectual property portfolio covers various aspects of other therapeutic categories including umbilical cord-derived huMPC therapy,
bone marrow-derived hbMPC therapy.
Moreover, our clinical trial protocols are proprietary, and we rely upon trade secret laws for protection of these protocols.
We intend to continue to vigorously pursue patent protection of the technologies we develop, both in China and under the Patent Cooperation Treaty
(“PCT”). Additionally, we require all of our employees to sign proprietary information and invention agreements, and compartmentalize our trade secrets in order
to protect our confidential information.
Patents
The following is a brief list of our patents, patent applications and work in process as of December 31, 2017:
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Work in Process
Patents Filed, Pending
Granted
Total
China Patents
U.S. Patents
EU Patents
Other
International
Patents
PCT
7
25
23
55
-
2
2
4
-
1
1
2
-
2
-
2
-
2
-
2
Generally, our patents cover technology, methods, design and composition of and relating to medical device kits used in collecting cell specimens,
cryopreservation of cells, purification, use of stem cells in a range of potential therapies, adipose tissue extraction, cell preservation and transportation,
preparation of chimeric antigen receptor, gene detection and quality control.
Manufacturing
We manufacture cells for our own research, testing and clinical trials. We are scaling up and expanding our manufacturing capacity to treat up to 10,000
CAR-T and 10,000 KOA patients per year when our facilities are fully operational by end of 2018. Our facilities are operated by a manufacturing and technology
team with decades of relevant experience in China, EU, and the U.S.
In any precision setting, it is vital that all controlled environment equipment meet certain design standards. We operate our manufacturing facilities under
good manufacturing practice ("GMP") conditions in the ISO accredited laboratories standard. We employ an institutionalized and proprietary process and quality
management system to optimize reproducibility and to hone our efficiency. Three of our facilities designed and built to GMP in Beijing, Shanghai and Wuxi, China
meet international standards. Specifically, our Shanghai cleanroom facility underwent rigorous cleanroom certification since 2013. Our facility in Shanghai was
issued a Certificate of Compliance by ENV Services, Inc., an ISO Inspection Service Provider, that (i) its rooms 1-7, 10 are certified to ISO Class 7 per ISO-
14644 in accordance with cGMP. (ii) its biological safety cabinets are certified per NSF/ANSI 49 and to ISO Class 5. and (iii) its instrumentation calibration has
been certified to perform in accordance with ANSI/NCSL Z-540-1 and document in accordance with 10CFR21. The cleanrooms in Beijing are certified to meet
the standard of CNAS L1669 and our Wuxi facility has been certified to meet the SHPMCC standard. With our integrated Plasmid, Viral Vectors, and CAR-T
cells Chemistry, Manufacturing, and Controls processes as well as planned capacity expansion, we believe that are highly distinguishable with other companies
in the cellular medicine space.
In January 2017, we leased a 113,038-square foot building located in the “Pharma Valley” of Shanghai, the People’s Republic of China. We are
establishing 43,000 square foot facilities there with 25 clean-rooms and equipped with 12 independent production lines to support clinical batch production and
commercial scale manufacturing. With above expansion, the Company could support up to 10,000 patients with CAR-T therapy and 10,000 KOA patients with
the stem cell therapy per annum.
We have built cell preparation and inspection laboratories that enable the following mode of human body immune cell in-vitro culture service to be
provided: make cell preparation for human body venous blood samples, after completion of the cell preparation, deliver the immune cell agents to the customer;
and provide immune function evaluation for the patients in Jilin and several other hospitals in China.
Competition
Many companies operate in the cellular biopharmaceutical field. In 2010, the FDA approved the first cell therapy for Dendreon Corporation to apply an
autologous cellular immunotherapy for the treatment of a certain type of prostate cancer. In May 2012 the Canadian authorities approved the first stem cell drug
and granted Osiris Therapeutics’ manufactured stem cell product for use in the pediatric graft-versus-host disease. To date there are over thirty publicly listed
and several private cellular biopharmaceutical focused companies outside of China with varying phases of clinical trials addressing a variety of diseases. We
compete with these companies in bringing cellular therapies to the market. However, our focus is to develop a core business in the China market. This
difference in focus places us in a different competitive environment from other western companies with respect to fund raising, clinical trials, collaborative
partnerships, and the markets in which we compete.
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The PRC central government has a focused strategy to enable China to compete effectively in certain designated areas of biotechnology and the health
sciences. Because of the aging population in China, China’s Ministry of Science and Technology (“MOST”) has targeted stem cell development as high priority
field, and development in this field has been intense in the agencies under MOST. For example, the 973 Program has funded a number of stem cell research
projects such as differentiation of human embryonic germ cells and the plasticity of adult stem cells. Notwithstanding such governmental support, China has
had a highly fragmented cellular medicine landscape. Shenzhen Beike Biotechnology Co. Ltd. (“Beike”) and Union Stem Cell & Gene Engineering Co., Ltd.
(“Union Stem Cell”) are two large stem cell companies in China. To the best of our knowledge, none of the Chinese companies are utilizing our proposed
international manufacturing protocol and our unique technologies in conducting what we believe will be fully compliant CFDA-sanctioned clinical trials to
commercialize cell therapies in China. Our management believes that it is difficult for most of these Chinese companies to turn their results into translational
stem cell science or commercially successful therapeutic products using internationally acceptable standards.
We compete globally with respect to the discovery and development of new cell based therapies, and we also compete within China to bring new
therapies to market. The biotechnology industry, namely in the areas of cell processing and manufacturing, clinical development of cellular therapies and cell
collection, processing and storage, are characterized by rapidly evolving technology and intense competition. Our competitors worldwide include pharmaceutical,
biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and government agencies engaged in drug discovery
activities or funding, in the U.S., Europe and Asia. Many of these companies are well-established and possess technical, research and development, financial,
and sales and marketing resources significantly greater than ours. In addition, many of our smaller potential competitors have formed strategic collaborations,
partnerships and other types of joint ventures with larger, well established industry competitors that afford these companies potential research and development
and commercialization advantages in the technology and therapeutic areas currently being pursued by us. Academic institutions, governmental agencies and
other public and private research organizations are also conducting and financing research activities which may produce products directly competitive to those
being commercialized by us. Moreover, many of these competitors may be able to obtain patent protection, obtain government (e.g. FDA) and other regulatory
approvals and begin commercial sales of their products before us.
Our primary competitors in the field of stem cell therapy for osteoarthritis, and other indications include Beike, Cytori Therapeutics Inc., Caladrius
Biosciences, Inc. and others. Among our competitors, to our knowledge, the only ones based in and operating in Greater China are Beike, Lorem Vascular,
which has partnered with Cytori to commercialize Cytori Cell Therapy for the cardiovascular, renal and diabetes markets in China and Hong Kong, and OLife Bio,
a Medi-Post joint venture with JingYuan Bio in Taian, Shandong Province, who plans to initiate clinical trial in China in 2016. Our primary competitors in the field
of cancer immune cell therapies include pharmaceutical, biotechnology companies such as Northwest Biotherapeutics, Inc., Juno Therapeutics, Inc., Kite
Pharma, Inc., CARSgen, Sorrento Therapeutics, Inc. and others. Among our competitors, the ones based in and operating in Greater China are BeiGene,
Limited, CARsgen and China Oncology Focus Limited, which has licensed Sorrento’s anti-PD-L1 monoclonal antibody for Greater China. Other western big
pharma and biotech companies in the cancer immune cell therapies space are starting to make inroads into China by partnering or seeking to partner with local
companies. For example, in April, 2016, Seattle-based Juno Therapeutics, Inc started a new company with WuXi AppTec in China named JW Biotechnology
(Shanghai) Co., Ltd. Its mission is to build China's leading cell therapy company by leveraging Juno's chimeric antigen receptor (CAR) and T cell receptor (TCR)
technologies together with WuXi AppTec's R&D and manufacturing platform and local expertise to develop novel cell-based immunotherapies for patients with
hematologic and solid organ cancers. In January 2017, Shanghai Fosun Pharmaceutical created a joint venture with Santa Monica-based Kite Pharma Inc. to
develop, manufacture and commercialize axicabtagene ciloleucel in China with the option to include additional products, including two T cell receptor (TCR)
product candidates from Kite. Axicabtagene ciloleucel is Kite's lead product candidate and is an investigational chimeric antigen receptor (CAR) T-cell therapy
under development for the treatment of B-cell lymphomas and leukemias. In late 2017 Gilead acquired Kite Pharma for $11.9 billion. On January 22, 2018
Celgene announced that it had agreed to buy Juno Therapeutics for approximately $9 billion.
The CFDA has received six applications for CD19 chimeric antigen receptor T cells cancer therapies from different companies. The applicants are
Nanjing Legend biotechnology, Chengdu Yinhe Biological medicine, Shanghai HRAIN Biotechnology, Carsgene Biomedicine (Shanghai), Biogene ANKE Cell
Technology and Shanghai Mingju Biotechnology.
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Additionally, in the general area of cell-based therapies for knee osteoarthritis ailments, we potentially compete with a variety of companies, from big
pharma to specialty medical products or biotechnology companies. Some of these, such as Abbvie, Merck KGaA, Sanofi, Teva, GlaxosmithKline, Baxter,
Johnson & Johnson, Sanumed, Medtronic and Miltenyi Biotec, are well-established and have substantial technical and financial resources compared to
ours. However, as cell-based products are only just emerging as viable medical therapies, many of our more direct competitors are smaller biotechnology and
specialty medical products companies comprised of Vericel Corporation, Regeneus Ltd., Advanced Cell Technology, Inc., Nuo Therapeutics, Inc., Arteriocyte
Medical Systems, Inc., ISTO technologies, Inc., Ember Therapeutics, Athersys, Inc., Bioheart, Inc., Cytori Therapeutics, Inc., Harvest Technologies Corporation,
Mesoblast, Pluristem, Inc., TissueGene, Inc. Medipost Co. Ltd. and others. There are also several non cell-based, small molecule and peptide clinical trials
targeting knee osteoarthritis, and several other FDA approved treatment for knee pain.
Some of our competitors also work with adipose-derived stem cells. To the best of our knowledge, none of these companies are currently utilizing the
same technologies as ours to treat KOA, nor to our knowledge are any of these companies conducting government-approved clinical trials in China.
Some of our targeted disease applications may compete with drugs from traditional pharmaceutical or Traditional Chinese Medicine companies. We
believe that our chosen targeted disease applications are not effectively in competition with the products and therapies offered by traditional pharmaceutical or
Traditional Chinese Medicine companies.
We believe we have a strategic advantage over our competitors based on our ability to meet cGMP regulatory requirements, a capability which we
believe is possessed by few to none of our competitors in China, in an industry in which meeting exacting standards and achieving extremely high purity levels is
crucial to success. In addition, in comparison to the broader range of cellar biopharmaceutical firms, we believe we have the advantages of cost and expediency,
and a first mover advantage with respect to commercialization of cell therapy products and treatments in the Greater China market.
Employees
As of December 31, 2017, the total enrollment of full time employees of CBMG is 125. Among these 125 professionals, 20 have PhD degrees, 54
have postgraduate degrees and 42 have undergraduate degrees. In other words, 93% of our employees are well qualified professionals. As a biotech company,
93 out of our 125 employees have medical or biological scientific credentials and qualifications.
Facilities
Our corporate headquarters are located at 19925 Stevens Creek Blvd., Suite 100 in Cupertino, California. We currently pay rent for a total of $268,000
per month for an aggregate of approximately 177,000 square feet of space to house our administration, research and manufacturing facilities in Maryland and in
the cities of Wuxi, Beijing and Shanghai in China.
Certain Tax Matters
Following the completion of our merger with EastBridge Investment Group Corporation (Delaware) on February 6, 2013, CBMG and its controlled
subsidiaries (the “CBMG Entities”) became a Controlled Foreign Corporation (CFC) under U.S. Internal Revenue Code Section 957. As a result, the CBMG
Entities are subject to anti-deferral provisions within the U.S. federal income tax system that were designed to limit deferral of taxable earnings otherwise
achieved by putting profit in low taxed offshore entities. While the CBMG Entities are subject to review under such provisions, the CBMG Entities’ earnings are
from an active business and should not be deemed to be distributions made to its U.S. parent company.
On December 22, 2017, the tax reform bill was passed (Tax Cut and Jobs Act (H.R.1)) and reduced top corporate tax rate from 35% to 21% effective
from January 1, 2018. Pursuant to this new Act, non-operating loss carry back period is eliminated and the loss carry forward period was expanded from 20
years to an indefinite period.
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Pursuant to the Corporate Income Tax Law of the PRC, all of the Company’s PRC subsidiaries are liable to PRC CIT at a rate of 25% except for Cellular
Biomedicine Group Ltd. (Shanghai) (“CBMG Shanghai”). According to Guoshuihan 2009 No. 203, if an entity is certified as an “advanced and new technology
enterprise”, it is entitled to a preferential income tax rate of 15%. CBMG Shanghai obtained the certificate of “advanced and new technology enterprise” dated
October 30, 2015 with an effective period of three years and the provision for PRC corporate income tax for CBMG Shanghai is calculated by applying the
income tax rate of 15% in 2017 (2016: 15%; 2015: 15%).
BIOPHARMACEUTICAL REGULATION
PRC Regulations
Our cellular medicine business operates in a highly regulated environment. In China, aside from provincial and local licensing authorities, hospitals and
their internal ethics and utilization committees, and a system of institutional review boards (“IRBs”) which in many cases have members appointed by provincial
authorities. With respect to cell therapies, however, the Chinese regulatory infrastructure is less established and China has not yet codified any mandatory
regulations governing the development of cell therapy products. In December 2017, the Chinese government issued trial guidelines concerning development
and testing of cell therapy products, including stem cell treatments and immune cell therapies such as CAR-T cell therapeutics. These trial guidelines are not
mandatory regulation but provide some general principles and basic requirements for cell therapy products in the areas of pharmaceutical research, non-clinical
research and clinical research. The cell therapy products provided in the trial guideline refer to the human-sourced living cell products which are used for human
disease therapy, whose source, operation and clinical trial process are in line with ethics and whose research and registration application are in line with
regulations on pharmaceutical administration. The competent authority of pharmaceutical administration is the CFDA. It is further clarified by the CFDA that the
non-registered clinical trial data would be acceptable for drug registration on a case by case basis, pending on the consistency of the samples used for the
clinical trial and the drug applied for registration, the generation process of the clinical trial data, whether the data is authentic, complete, accurate and traceable
to the source, and the inspection outcome of the CFDA on the clinical trial. Moreover, an applicant of the clinical trial of the said cell therapyproducts can
propose the phases of the clinical trial and the trial plan by itself (generally the trial can be divided into early stage clinical trial phase and confirmatory clinical
trial phase), instead of the application of the traditional phases I, II and III of a clinical trial. However, it remains unclear if any of our clinical trials will be offered
U.S.FDA-like Fast Track designation as maintenance therapy in subjects with advanced cancer who have limited options following surgery and front-line
platinum/taxane chemotherapy to improve their progression-free survival. By applying U.S. standards and protocols and following authorized treatment plans in
China, we believe we are differentiated from our competition as we believe we have first mover’s advantage in an undeveloped industry. In addition, we have
begun to review the feasibility of performing synergistic U.S. clinical studies.
PRC Operating Licenses
Our business operations in China are subject to customary regulation and licensing requirements under regulatory agencies including the local
Administration for Industry and Commerce, General Administration of Quality Supervision, Inspection and Quarantine, and the State Administration of Taxation,
for each of our business locations. Additionally, our clean room facilities and the use of reagents is also regulated by local branches of the Ministry of
Environmental Protection. We are in good standing with respect to each of our business operating licenses.
U.S. Government Regulation
The health care industry is one of the most highly regulated industries in the United States. The federal government, individual state and local
governments, as well as private accreditation organizations, oversee and monitor the activities of individuals and businesses engaged in the development,
manufacture and delivery of health care products and services. Federal laws and regulations seek to protect the health, safety, and welfare of the citizens of the
United States, as well as to prevent fraud and abuse associated with the purchase of health care products and services with federal monies. The relevant state
and local laws and regulations similarly seek to protect the health, safety, and welfare of the states’ citizens and prevent fraud and abuse. Accreditation
organizations help to establish and support industry standards and monitor new developments.
HCT/P Regulations
Manufacturing facilities that produce cellular therapies are subject to extensive regulation by the U.S. FDA. In particular, U.S. FDA regulations set forth
requirements pertaining to establishments that manufacture human cells, tissues, and cellular and tissue-based products (“HCT/Ps”). Title 21, Code of Federal
Regulations, Part 1271 (21 CFR Part 1271) provides for a unified registration and listing system, donor-eligibility, current Good Tissue Practices (“cGTP”), and
other requirements that are intended to prevent the introduction, transmission, and spread of communicable diseases by HCT/Ps. While we currently have no
plans to conduct these activities within the United States, these regulations may be relevant to us if in the future we become subject to them, or if parallel rules
are imposed on our operations in China.
We currently collect, process, store and manufacture HCT/Ps, including manufacturing cellular therapy products. We also collect, process, and store
HCT/Ps. Accordingly, we comply with cGTP and cGMP guidelines that apply to biological products. Our management believes that certain other requirements
pertaining to biological products, such as requirements pertaining to premarket approval, do not currently apply to us because we are not currently investigating,
marketing or selling cellular therapy products in the United States. If we change our business operations in the future, the FDA requirements that apply to us
may also change.
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Certain state and local governments within the United States also regulate cell-processing facilities by requiring them to obtain other specific licenses.
Certain states may also have enacted laws and regulations, or may be considering laws and regulations, regarding the use and marketing of stem cells or cell
therapy products, such as those derived from human embryos. While these laws and regulations should not directly affect our business, they could affect our
future business. Presently we are not subject to any of these state law requirements, because we do not conduct these regulated activities within the United
States.
Pharmaceutical and Biological Products
In the United States, pharmaceutical and biological products, including cellular therapies, are subject to extensive pre- and post-market regulation by the
FDA. The Federal Food, Drug, and Cosmetic Act (“FD&C Act”), and other federal and state statutes and regulations, govern, among other things, the research,
development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting,
sampling, and import and export of pharmaceutical products. Biological products are approved for marketing under provisions of the Public Health Service Act, or
PHS Act. However, because most biological products also meet the definition of “drugs” under the FD&C Act, they are also subject to regulation under FD&C Act
provisions. The PHS Act requires the submission of a biologics license application (“BLA”), rather than a New Drug Application ("NDA"), for market authorization.
However, the application process and requirements for approval of BLAs are similar to those for NDAs, and biologics are associated with similar approval risks
and costs as drugs. Presently we are not subject to any of these requirements, because we do not conduct these regulated activities within the United
States. However, these regulations may be relevant to us should we engage in these activities in the United States in the future.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please
read our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from
us or from the SEC at the SEC's Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access
to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 1A. Risk Factors
We have a limited operating history and expect significant operating losses for the next few years.
RISKS RELATED TO OUR COMPANY
We are a company with a limited operating history and have incurred substantial losses and negative cash flow from operations through the year ended
December 31, 2017. Our cash flow from operations may not be consistent from period to period, our biopharmaceutical business has not yet generated
substantial revenue, and we may continue to incur losses and negative cash flow in future periods, particularly within the next several years.
Our biopharmaceutical product development programs are based on novel technologies and are inherently risky.
We are subject to the risks of failure inherent in the development of products based on new biomedical technologies. The novel nature of these cell-
based therapies creates significant challenges in regard to product development and optimization, manufacturing, government regulation, third party
reimbursement, and market acceptance, including the challenges of:
● Educating medical personnel regarding the application protocol;
● Sourcing clinical and commercial supplies for the materials used to manufacture and process our product candidates;
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● Developing a consistent and reliable process, while limiting contamination risks regarding the application protocol;
● Conditioning patients with chemotherapy in conjunction with delivering immune cell therapy treatment, which may increase the risk of adverse side
effects;
● Obtaining regulatory approval, as the Chinese Food and Drug Administration, or CFDA, and other regulatory authorities have limited experience with
commercial development of cell-based therapies, and therefore the pathway to regulatory approval may be more complex and require more time
than we anticipate; and
● Establishing sales and marketing capabilities upon obtaining any regulatory approval to gain market acceptance of cell therapy.
These challenges may prevent us from developing and commercializing products on a timely or profitable basis or at all.
We face risks relating to the cell therapy industry, clinical development and commercialization.
Cell therapy is still a developing field and a significant global market for our services has yet to emerge. Our cellular therapy candidates are based on
novel cell technologies that are inherently risky and may not be understood or accepted by the marketplace. The current market principally consists of providing
manufacturing of cell and tissue-based therapeutic products for clinical trials and processing of stem cell products for therapeutic programs.
The degree of market acceptance of any future product candidates will depend on a number of factors, including:
● the clinical safety and effectiveness of the product candidates, the availability of alternative treatments and the perceived advantages of the
particular product candidates over alternative treatments;
● the relative convenience and ease of administration of the product candidates;
● our ability to separate the product candidates from the ethical controversies and political barriers associated with stem cell product candidates
derived from human embryonic or fetal tissue;
● ethical concerns that may arise regarding our commercial use of stem cells, including adult stem cells, in the manufacture of the product candidates;
● the frequency and severity of adverse events or other undesirable side effects involving the product candidates or the products or product
candidates of others that are cell-based; and
● the cost of the products, the reimbursement policies of government and third-party payors and our ability to obtain sufficient third-party coverage or
reimbursement.
Laws and the regulatory infrastructure governing cellular biopharmaceuticals in China are relatively new and less established in comparison to the
U.S. and other countries; accordingly regulation may be less stable and predictable than desired, and regulatory changes may disrupt our
commercialization process.
In December 2017, the Chinese government issued trial guidelines concerning development and testing of cell therapy products, including stem cell
treatments and immune cell therapies such as CAR-T cell therapeutics. These trial guidelines are not mandatory regulation but provide some general principles
and basic requirements for cell therapy products in the areas of pharmaceutical research, non-clinical research and clinical research. The cell therapy products
provided in the trial guideline refer to the human-sourced living cell products which are used for human disease therapy, whose source, operation and clinical
trial process are in line with ethics and whose research and registration application are in line with regulations on pharmaceutical administration. The competent
authority of pharmaceutical administration is the CFDA. It is further clarified by the CFDA that the non-registered clinical trial data would be acceptable for drug
registration on a case by case basis, pending on the consistency of the samples used for the clinical trial and the drug applied for registration, the generation
process of the clinical trial data, whether the data is authentic, complete, accurate and traceable to the source, and the inspection outcome of the CFDA on the
clinical trial. Moreover, an applicant of the clinical trial of the said cell therapyproducts can propose the phases of the clinical trial and the trial plan by itself
(generally the trial can be divided into early stage clinical trial phase and confirmatory clinical trial phase), instead of the application of the traditional phases I, II
and III of a clinical trial. However, remains unclear if any of our clinical trials will be offered U.S.FDA-like Fast Track designation as maintenance therapy in
subjects with advanced cancer who have limited options following surgery and front-line platinum/taxane chemotherapy to improve their progression-free
survival. We do not know if our animal studies documentation will be approved to support trials in humans. We also do not know if our cell lines will be accepted
by the PRC health authorities. Thesefactors could adversely affect the timing of the clinical trials, the timing of receipt and reporting of clinical data, the timing of
Company-sponsored IND filings, and our ability to conduct future planned clinical trials, and any of the above could have a material adverse effect on our
business.
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CFDA’s regulations may limit our ability to develop, license, manufacture and market our products and services.
Some or all of our operations in China will be subject to oversight and regulation by the CFDA and MOH. Government regulations, among other things,
cover the inspection of and controls over testing, manufacturing, safety and environmental considerations, efficacy, labeling, advertising, promotion, record
keeping and sale and distribution of pharmaceutical products. Such government regulations may increase our costs and prevent or delay the licensing,
manufacturing and marketing of any of our products or services. In the event we seek to license, manufacture, sell or distribute new products or services, we
likely will need approvals from certain government agencies such as the future growth and profitability of any operations in China would be contingent on
obtaining the requisite approvals. There can be no assurance that we will obtain such approvals.
In 2003, the CFDA implemented new guidelines for the licensing of pharmaceutical products. All existing manufacturers with licenses were required to
apply for the Good Manufacturing Practices (“cGMP”) certifications. According to Good Manufacturing Practices for Pharmaceutical Products (revised edition
2010), or the New GMP Rules promulgated by the Ministry of Health of the PRC on January 17, 2011 which became effective on March 1, 2011, all the newly
constructed manufacturing facilities of drug manufacture enterprises in China shall comply with the requirements of the New GMP Rules, which are stricter than
the original GMP standards.
In addition, delays, product recalls or failures to receive approval may be encountered based upon additional government regulation, legislative changes,
administrative action or changes in governmental policy and interpretation applicable to the Chinese pharmaceutical industry. Our pharmaceutical activities also
may subject us to government regulations with respect to product prices and other marketing and promotional related activities. Government regulations may
substantially increase our costs for developing, licensing, manufacturing and marketing any products or services, which could have a material adverse effect on
our business, operating results and financial condition.
The CFDA and other regulatory authorities in China have implemented a series of new punitive and stringent measures regarding the pharmaceuticals
industry to redress certain past misconducts in the industry and certain deficiencies in public health reform policies. Given the nature and extent of such new
enforcement measures, the aggressive manner in which such enforcement is being conducted and the fact that newly-constituted local level branches are
encouraged to issue such punishments and fines, there is the possibility of large scale and significant penalties being levied on manufacturers. These new
measures may include fines, restriction and suspension of operations and marketing and other unspecified penalties. This new regulatory environment has
added significantly to the risks of our businesses in China and may have a material adverse effect on our business, operating results and financial condition.
Our technology platforms, including our CAR-T, Tcm, whether preclinical or clinical, and the cancer vaccine technologies are new approaches to
cancer treatment that present significant challenges.
We have concentrated our research and development efforts on T cell immunotherapy technology, and our future success in cancer treatment is
dependent on the successful development of T cell immunotherapies in general and our CAR and vaccine technologies and product candidates in particular. Our
approach to cancer treatment aims to alter T cells ex vivo through genetic modification using viruses designed to reengineer the T cells to recognize specific
proteins on the surface or inside cancer cells. Because this is a new approach to cancer immunotherapy and cancer treatment generally, developing and
commercializing our product candidates subjects us to many challenges.
We cannot be sure that our T cell immunotherapy and vaccine technologies will yield satisfactory products that are safe and effective, scalable, or
profitable. Additionally, because our technology involves the genetic modification of patient cells ex vivo using a virus, we are subject to many of the challenges
and risks that gene therapies face, including regulatory requirements governing gene and cell therapy products have changed frequently.
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Moreover, public perception of therapy safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence
the willingness of subjects to participate in clinical trials, or if approved, of physicians to subscribe to the novel treatment mechanics. Physicians, hospitals and
third-party payers often are slow to adopt new products, technologies and treatment practices that require additional upfront costs and training. Physicians may
not be willing to undergo training to adopt this novel and personalized therapy, may decide the therapy is too complex to adopt without appropriate training and
may choose not to administer the therapy. Based on these and other factors, hospitals and payers may decide that the benefits of this new therapy do not or will
not outweigh its costs.
Our near term ability to generate significant product revenue is dependent on the success of one or more of our CD19, CD22, CD30 and HER1, as well
as CD40GVAX product candidates, each of which are at an early-stage of development and will require significant additional clinical testing before
we can seek regulatory approval and begin commercial sales.
Our near term ability to generate significant product revenue is highly dependent on our ability to obtain regulatory approval of and successfully
commercialize one or more of our CD19, CD20, CD30 and HER1, as well as CD40GVAX product candidates. All of these products are in the early stages of
development, have been tested in a relatively small number of patients, and will require additional clinical and nonclinical development, regulatory review and
approval in each jurisdiction in which we intend to market the products, substantial investment, access to sufficient commercial manufacturing capacity, and
significant marketing efforts before we can generate any revenue from product sales. Before obtaining marketing approval from regulatory authorities for the sale
of our product candidates, we must conduct extensive clinical studies to demonstrate the safety, purity, and potency of the product candidates in humans. We
cannot be certain that any of our product candidates will be successful in clinical studies and they may not receive regulatory approval even if they are
successful in clinical studies.
If our products, once developed, encounter safety or efficacy problems, developmental delays, regulatory issues, or other problems, our development
plans and business could be significantly harmed. Further, competitors who are developing products with similar technology may experience problems with their
products that could identify problems that would potentially harm our business.
Third parties have sponsored and conducted all clinical trials of our CD19, CD20, CD30 and HER1, as well as the CD40GVAX vaccine product
candidates so far, and our ability to influence the design and conduct of such trials has been limited. We plan to assume control over future clinical
and regulatory development of the CD20, CD30 and HER1, and may do so for other product candidates, which will entail additional expenses and
may be subject to delay. Any failure by a third party to meet its obligations with respect to the clinical and regulatory development of our product
candidates may delay or impair our ability to obtain regulatory approval for our products and result in liability for our company.
On November 29, 2016 we announced the approval and commencement of patient enrollment in China for our CARD-1 (“CAR-T Against DLBCL”)
Phase I clinical trial utilizing our optimized proprietary C-CAR011 construct of CD19 CAR-T therapy for the treatment of patients with refractory DLBCL. On
January 9, 2017 we announced the approval and commencement of patient enrollment in China for our CALL-1 (“CAR-T against Acute Lymphoblastic
Leukemia”) Phase I clinical trial utilizing our optimized proprietary C-CAR011 construct of CD19 CAR-T therapy for the treatment of patients with relapsed or
refractory (r/r) CD19+ B-cell ALL. We do not know if our Phase I CARD-1 or CALL-1 results will justify initiation of larger Phase II clinical trials.
To date, we have yet to sponsor any clinical trials relating to our CD20, CD30, HER1 and CD40GVAX product candidates or other product candidates.
Instead, faculty members at our third-party research institution collaborators, or those institutions themselves, have sponsored all clinical trials relating to these
product candidates, in each case under their own IRB with the respective regulatory agency. We plan to assume control of the overall clinical and regulatory
development of CD19, CD20, CD30 and HER1 for future clinical trials and obtain sponsorship of the INDs or file new Company-sponsored INDs in China and/or
the United States. We will evaluate options to conducting the U.S. CD40LGVAX Trial and to continuing the related IND with the Federal Drug Administration
(“FDA”). Failure to obtain, or delays in obtaining, sponsorship of INDs or in filing new Company-sponsored INDs for these or any other product candidates we
determine to advance could negatively affect the timing of our potential future clinical trials. Such an impact on timing could increase research and development
costs and could delay or prevent obtaining regulatory approval for our most advanced product candidates, either of which could have a material adverse effect on
our business.
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Further, even in the event that the IND sponsorship is obtained for existing and new INDs, it is possible that the CFDA or other regulatory agencies will
not accept any of the trials as providing adequate support for future clinical trials, whether controlled by us or third parties, for any of one or more reasons,
including the safety, purity, and potency of the product candidate, the degree of product characterization, elements of the design or execution of the previous
trials or safety concerns, or other trial results. We may also be subject to liabilities arising from any treatment-related injuries or adverse effects in patients
enrolled in these previous trials. As a result, we may be subject to unforeseen third-party claims and delays in our potential future clinical trials. We may also be
required to repeat in whole or in part clinical trials previously conducted by our third-party research institution collaborators, which will be expensive and delay
the submission and licensure or other regulatory approvals with respect to any of our product candidates. Any such delay or liability could have a material
adverse effect on our business.
Moreover, although we plan to assume control of the overall clinical and regulatory development of CD19, CD20, CD30 and HER1 going forward, we
have so far been dependent on contractual arrangements with our third-party research institution collaborators and will continue to be until we assume control.
To the extent that we do not use our own scientific team to conduct trials, we are and will be dependent contractual arrangements with third-party research
institution collaborators for ongoing and planned trials for our product candidates. Such arrangements provide us certain information rights with respect to the
previous, planned, or ongoing trials, including access to and the ability to use and reference the data, including for our own regulatory filings, resulting from such
trials. If our third-party research institution collaborators breach these obligations, or if the data prove to be inadequate compared to the first-hand knowledge we
might have gained had the completed trials been Company-sponsored trials, then our ability to design and conduct our planned corporate-sponsored clinical
trials may be adversely affected. Additionally, the regulatory agencies may disagree with the sufficiency of our right to reference the preclinical, manufacturing,
or clinical data generated by these prior investigator-sponsored trials, or our interpretation of preclinical, manufacturing, or clinical data from these clinical trials.
If so, the regulatory agencies may require us to obtain and submit additional preclinical, manufacturing, or clinical data before we may begin our planned trials
and/or may not accept such additional data as adequate to begin our planned trials.
Our CD19, CD20, CD30 and HER1 , as well as the CD40GVAX product candidates are biologics and the manufacture of our product candidates is
complex and we may encounter difficulties in production, particularly with respect to process development or scaling-out of our manufacturing
capabilities. If we or any of our third-party manufacturers encounter such difficulties, our ability to provide supply of our product candidates for
clinical trials or our products for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost
structure.
Our immune cell CAR-T and vaccine product candidates are biologics and the process of manufacturing our products is complex, highly- regulated and
subject to multiple risks. The manufacture of our product candidates involves complex processes, including harvesting T cells from patients, genetically modifying
the T cells ex vivo, multiplying the T cells to obtain the desired dose, and ultimately infusing the T cells back into a patient’s body. As a result of the complexities,
the cost to manufacture these biologics in general, and our genetically modified cell product candidates in particular, is generally higher than the adipose stem
cell, and the manufacturing process is less reliable and is more difficult to reproduce. Our manufacturing process will be susceptible to product loss or failure due
to logistical issues associated with the collection of white blood cells, or starting material, from the patient, shipping such material to the manufacturing site,
shipping the final product back to the patient, and infusing the patient with the product, manufacturing issues associated with the differences in patient starting
materials, interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or
operator error, inconsistency in cell growth, and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in
reduced production yields, product defects, and other supply disruptions. If for any reason we lose a patient’s starting material or later-developed product at any
point in the process, the manufacturing process for that patient will need to be restarted and the resulting delay may adversely affect that patient’s outcome. If
microbial, viral, or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made,
such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Because our product
candidates are manufactured for each particular patient, we will be required to maintain a chain of identity with respect to materials as they move from the patient
to the manufacturing facility, through the manufacturing process, and back to the patient. Maintaining such a chain of identity is difficult and complex, and failure
to do so could result in adverse patient outcomes, loss of product, or regulatory action including withdrawal of our products from the market. Further, as product
candidates are developed through preclinical to late stage clinical trials towards approval and commercialization, it is common that various aspects of the
development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk
that they will not achieve these intended objectives, and any of these changes could cause our product candidates to perform differently and affect the results of
planned clinical trials or other future clinical trials.
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Although we continue to develop our own manufacturing facilities to support our clinical and commercial manufacturing activities, we may, in any event,
never be successful in developing our own manufacturing facilities. We have not yet caused our product candidates to be manufactured or processed on a
commercial scale and may not be able to do so for any of our product candidates. Although our manufacturing and processing approach is based upon the
current approach undertaken by our third-party research institution collaborators, we do not have experience in managing the vaccine manufacturing process,
and our process may be more difficult or expensive than the approaches currently in use. We will make changes as we work to optimize the manufacturing
process, and we cannot be sure that even minor changes in the process will not result in significantly different CAR-T, stem cell or vaccine that may not be as
safe and effective as the current products deployed by our third-party research institution collaborators. As a result of these challenges, we may experience
delays in our clinical development and/or commercialization plans. The manufacturing risks could delay or prevent the completion of our clinical trials or the
approval of any of our product candidates by the FDA, CFDA or other regulatory authorities, result in higher costs or adversely impact commercialization of our
product candidates. In addition, we will rely on third parties to perform certain specification tests on our product candidates prior to delivery to patients. If these
tests are not appropriately done and test data are not reliable, patients could be put at risk of serious harm and the FDA, CFDA or other regulatory authorities
could require additional clinical trials or place significant restrictions on our company until deficiencies are remedied. We may ultimately be unable to reduce the
cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product candidates are commercialized.
We rely heavily on third parties to conduct clinical trials on our product candidates.
We presently are party to, and expect that we will be required to enter into, agreements with hospitals and other research partners to perform clinical
trials for us and to engage in sales, marketing and distribution efforts for our products and product candidates we may acquire in the future. We may be unable to
establish or maintain third-party relationships on a commercially reasonable basis, if at all. In addition, these third parties may have similar or more established
relationships with our competitors or other larger customers. Moreover, the loss for any reason of one or more of these key partners could have a significant and
adverse impact on our business. If we are unable to obtain or retain third party sales and marketing vendors on commercially acceptable terms, we may not be
able to commercialize our therapy products as planned and we may experience delays in or suspension of our marketing launch. Our dependence upon third
parties may adversely affect our ability to generate profits or acceptable profit margins and our ability to develop and deliver such products on a timely and
competitive basis.
Outside scientists and their third-party research institutions on whom we rely for research and development and early clinical testing of our product
candidates may have other commitments or conflicts of interest, which could limit our access to their expertise and harm our ability to leverage our
technology platform.
We currently have limited internal research and development capabilities and are currently conducting no independent clinical trials with our, CD20,
CD30, HER1 and CD40GVAX product candidates or our other product candidates. We therefore rely at present on our third-party research institution
collaborators for both capabilities.
The outside scientists who conduct the clinical testing of our current product candidates, and who conduct the research and development upon which
our product candidate pipeline depends, are not our employees; rather they serve as either independent contractors or the primary investigators under
collaboration that we have with their sponsoring academic or research institution. Such scientists and collaborators may have other commitments that would
limit their availability to us. Although our scientific advisors generally agree not to do competing work, if an actual or potential conflict of interest between their
work for us and their work for another entity arises, we may lose their services. We are currently evaluating the feasibility of conducting these trials ourselves or
commencing the trial in the United States or elsewhere. These factors could adversely affect the timing of the clinical trials, the timing of receipt and reporting of
clinical data, the timing of Company-sponsored IND filings, and our ability to conduct future planned clinical trials. It is also possible that some of our valuable
proprietary knowledge may become publicly known through these scientific advisors if they breach their confidentiality agreements with us, which would cause
competitive harm to, and have a material adverse effect on our business.
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If we are unable to maintain our licenses, patents or other intellectual property we could lose important protections that are material to continuing
our operations and our future prospects.
We operate in the highly technical field of development of regenerative and immune cellular therapies. In addition to patents, we rely in part on
trademark, trade secret and protection to protect our intellectual properties comprised of proprietary know how, technology and processes. However, trade
secrets are difficult to protect. We have entered and expect to continue to enter into confidentiality and intellectual property assignment agreements with
our employees, consultants, outside scientific collaborators, sponsored researchers, affiliates, other advisors and potential investors. These agreements
generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the
party by us. These agreements may also provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property.
However, these agreements may be difficult to enforce, or can be breached and may not effectively protect our intellectual property rights.
In addition to contractual measures, we try to protect the confidential nature of our proprietary information by compartmentalize our intellectual properties
as well as using other security measures. Such physical and technology measures may not provide adequate protection for our proprietary information. For
example, our security measures may not prevent an employee or consultant with authorized access from misappropriating our trade secrets and providing them
to a competitor, and the recourse we have available against such misconduct may be inadequate to adequately protect our interests. Enforcing a claim that a
party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts
outside the United States may be less willing to protect trade secrets. Furthermore, others may independently develop our proprietary information in a manner
that could prevent legal recourse by us. If any of our confidential or proprietary information, including our trade secrets and know how, were to be disclosed or
misappropriated, or if a competitor independently developed any such information, our competitive position could be harmed.
We may be unable to obtain or maintain patent protection for our products and product candidates, which could have a material adverse effect on
our business.
Our commercial success will depend, in part, on obtaining and maintaining patent protection for new technologies, product candidates, products and
processes and successfully defending such patents against third party challenges. To that end, we file or acquire patent applications, and have been issued
patents that are intended to cover certain methods and uses relating to stem cells and cancer immune cell therapies.
The patent positions of biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions and recent court
decisions have introduced significant uncertainty regarding the strength of patents in the industry. Moreover, the legal systems of some countries do not favor
the aggressive enforcement of patents and may not protect our intellectual property rights to the same extent as they would, for instance, under the laws of the
United States. Any of the issued patents we own or license may be challenged by third parties and held to be invalid, unenforceable or with a narrower or
different scope of coverage that what we currently believe, effectively reducing or eliminating protection we believed we had against competitors with similar
products or technologies. If we ultimately engage in and lose any such patent disputes, we could be subject to competition and/or significant liabilities, we could
be required to enter into third party licenses or we could be required to cease using the disputed technology or product. In addition, even if such licenses are
available, the terms of any license requested by a third party could be unacceptable to us.
The claims of any current or future patents that may issue or be licensed to us may not contain claims that are sufficiently broad to prevent others from
utilizing the covered technologies and thus may provide us with little commercial protection against competing products. Consequently, our competitors may
independently develop competing products that do not infringe our patents or other intellectual property. To the extent a competitor can develop similar products
using a different chemistry, our patents and patent applications may not prevent others from directly competing with us. Product development and approval
timelines for certain products and therapies in our industry can require a significant amount of time (i.e. many years). As such, it is possible that any patents that
may cover an approved product or therapy may have expired at the time of commercialization or only have a short remaining period of exclusivity, thereby
reducing the commercial advantages of the patent. In such case, we would then rely solely on other forms of exclusivity which may provide less protection to our
competitive position.
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Litigation relating to intellectual property is expensive, time consuming and uncertain, and we may be unsuccessful in our efforts to protect against
infringement by third parties or defend ourselves against claims of infringement.
To protect our intellectual property, we may initiate litigation or other proceedings. In general, intellectual property litigation is costly, time-consuming,
diverts the attention of management and technical personnel and could result in substantial uncertainty regarding our future viability, even if we ultimately
prevail. Some of our competitors may be able to sustain the costs of such litigation or other proceedings more effectively than can we because of their
substantially greater financial resources. The loss or narrowing of our intellectual property protection, the inability to secure or enforce our intellectual property
rights or a finding that we have infringed the intellectual property rights of a third party could limit our ability to develop or market our products and services in the
future or adversely affect our revenues. Furthermore, any public announcements related to such litigation or regulatory proceedings could adversely affect the
price of our common stock. Third parties may allege that the research, development and commercialization activities we conduct infringe patents or other
proprietary rights owned by such parties. This may turn out to be the case even though we have conducted a search and analysis of third-party patent rights and
have determined that certain aspects of our research and development and proposed products activities apparently do not infringe on any third-party Chinese
patent rights. If we are found to have infringed the patents of a third party, we may be required to pay substantial damages; we also may be required to seek
from such party a license, which may not be available on acceptable terms, if at all, to continue our activities. A judicial finding or infringement or the failure to
obtain necessary licenses could prevent us from commercializing our products, which would have a material adverse effect on our business, operating results
and financial condition.
We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our
intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on our product candidates in all countries and jurisdictions throughout the world would be impracticable and
cost prohibitive, and our intellectual property rights in some countries could be less extensive than those in the People’s Republic of China or the United States,
assuming that rights are obtained in these jurisdiction. In addition, the laws of some foreign countries may not protect all of our intellectual properties.
If we are unable to protect the confidentiality of trade secrets, our competitive position could be impaired.
A significant amount of our technology, particularly with respect to our proprietary manufacturing processes, is unpatented and is held in the form of
trade secrets. Our efforts to protect these trade secrets are comprised of the use of confidentiality and proprietary information agreement, physically secured
documentation, and knowledge segmentation among our staff. Even so, improper use or disclosure of our confidential information could occur and in such cases
adequate remedies may be insufficient to protect our competitive position or may not exist. The inadvertent disclosure of our trade secrets could also impair our
competitive position.
PRC intellectual property law requires us to compensate our employees for the intellectual property that they may help to develop.
We have entered and expect to continue to enter into confidentiality and intellectual property assignment agreements with most of our employees,
consultants, outside scientific collaborators, sponsored researchers, affiliates and other advisors. These agreements generally require that the other party keep
confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us. These agreements may also
provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may be
difficult to enforce, or can be breached and may not effectively protect our intellectual property rights.
The PRC laws codify a “reward/award” policy which entitles employees to certain levels of compensation and bonus from their service invention-
creations for which their employers filed for patent protection. In the absence of any contractual understanding, the Implementing Rules of the Patent Law
require a minimum compensation and bonus to such employees as below: bonus: (i) for each invention patent, a one-time reward of no less than 3,000 RMB, or
(ii) for each utility model or design patent, a one-time reward of no less than 1,000 RMB, and compensation: (i) for each invention patent and utility model, at
least 2% of annual operating profits derived from the use of the patent, (ii) for each design patent, at least 0.2% of annual operating profits derived from the use
of the design patent, and (iii) at least 10% of royalties received from the licensing the patent to a third party.
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Although our bylaws allow for us to issue bonuses to our employees, we have not contractually limited the amount of compensation that we may pay
them for filing patents for their ideas, developments, discoveries or inventions. As such, should any of our employees and consultants who have not contractually
agreed otherwise seek to enforce these rights, we may be required to pay the statutorily mandated minimum to our employees as required by this law. Our
product candidates are still in the clinical trial stage and as of the date of this annual report, we have not derived any revenue from our product-related patents.
However, if and when we commercialize our product candidates or therapies, or if we are required to pay our employees any compensation for patents relating
to our technical services, such compensation could be substantial and may harm our business prospects, financial condition and results of operations.
Our technologies are at early stages of discovery and development, and we may fail to develop any commercially acceptable or profitable products.
We have yet to develop any therapeutic products that have been approved for marketing, and we do not expect to become profitable within the next
several years, but rather expect our biopharmaceutical business to incur additional and increasing operating losses. Before commercializing any therapeutic
product in China, we may be required to obtain regulatory approval from the MOH CFDA, local regulatory authorities, and/or individual hospitals, and outside
China from equivalent foreign agencies after conducting extensive preclinical studies and clinical trials that demonstrate that the product candidate is safe and
effective.
We may elect to delay or discontinue studies or clinical trials based on unfavorable results. Any product developed from, or based on, cell technologies
may fail to:
● survive and persist in the desired location;
● provide the intended therapeutic benefit;
● engraft or integrate into existing tissue in the desired manner; or
● achieve therapeutic benefits equal to, or better than, the standard of treatment at the time of testing.
In addition, our therapeutic products may cause undesirable side effects. Results of preclinical research in animals may not be indicative of future clinical
results in humans.
Ultimately if regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable to commercialize our
products, and our business and results of operations would be harmed. Even if we do succeed in developing products, we will face many potential obstacles
such as the need to develop or obtain manufacturing, marketing and distribution capabilities. Furthermore, because transplantation of cells is a new form of
therapy, the marketplace may not accept any products we may develop.
Most potential applications of our technology are pre-commercialization, which subjects us to development and marketing risks.
We are in a relatively early stage on the path to commercialization with many of our products. Successful development and market acceptance of our
products is subject to developmental risks, including failure to achieve innovative solutions to problems during development, ineffectiveness, lack of safety,
unreliability, failure to receive necessary regulatory clearances or approvals, approval by hospital ethics committees and other governing bodies, high
commercial cost, preclusion or obsolescence resulting from third parties’ proprietary rights or superior or equivalent products, competition, and general economic
conditions affecting purchasing patterns. There is no assurance that we or our partners will successfully develop and commercialize our products, or that our
competitors will not develop competing products, treatments or technologies that are less expensive or superior. Failure to successfully develop and market our
products would have a substantial negative effect on our results of operations and financial condition.
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Market acceptance of new technology such as ours can be difficult to obtain.
New and emerging cell therapy and cell banking technologies may have difficulty or encounter significant delays in obtaining market acceptance in some
or all countries around the world due to the novelty of our cell therapy and cell banking technologies. Therefore, the market adoption of our cell therapy and cell
banking technologies may be slow and lengthy with no assurances that the technology will be successfully adopted. The lack of market adoption or reduced or
minimal market adoption of cell therapy and cell banking technologies may have a significant impact on our ability to successfully sell our future product(s) or
therapies within China or in other countries. Our strategy depends in part on the adoption of the therapies we may develop by state-owned hospital systems in
China, and the allocation of resources to new technologies and treatment methods is largely dependent upon ethics committees and governing bodies within the
hospitals. Even if our clinical trials are successful, there can be no assurance that hospitals in China will adopt our technology and therapies as readily as we
may anticipate.
Future clinical trial results may differ significantly from our expectations.
While we have proceeded incrementally with our clinical trials in an effort to gauge the risks of proceeding with larger and more expensive trials, we
cannot guarantee that we will not experience negative results with larger and much more expensive clinical trials than we have conducted to date. Poor results
in our clinical trials could result in substantial delays in commercialization, substantial negative effects on the perception of our products, and substantial
additional costs. These risks are increased by our reliance on third parties in the performance of many of the clinical trial functions, including the clinical
investigators, hospitals, and other third party service providers.
If clinical trials of our technology fail to demonstrate safety and efficacy to the satisfaction of the relevant regulatory authorities, including the PRC’s
State Food and Drug Administration and the Ministry of Health, or do not otherwise produce positive results, we may incur additional costs or
experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidates.
Currently, a regulatory structure has not been established to standardize the approval process for products or therapies based on the technology that
exists or that is being developed in our field. Therefore we must conduct, at our own expense, extensive clinical trials to demonstrate the safety and efficacy of
the product candidates in humans, and then archive our results until such time as a new regulatory regime is put in place. If and when this new regulatory regime
is adopted it may be easier or more difficult to navigate than CBMG may anticipate, with the following potential barriers:
● regulators or institutional review boards may not authorize us or our investigators to commence clinical trials or conduct clinical trials at a
prospective trial site;
● clinical trials of product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct
additional clinical trials or abandon product development programs that we expect to be pursuing;
● the number of patients required for clinical trials of product candidates may be larger than we anticipate, enrollment in these clinical trials may be
slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;
● third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner or at all;
● we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being
exposed to unacceptable health risks;
● regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons,
including noncompliance with regulatory requirements;
● the cost of clinical trials of our product candidates may be greater than anticipated;
● we may be subject to a more complex regulatory process, since cell-based therapies are relatively new and regulatory agencies have less
experience with them as compared to traditional pharmaceutical products;
● the supply or quality of our product candidates or other materials necessary to conduct clinical trials of these product candidates may be insufficient
or inadequate; and
● our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators to halt or terminate the
trials.
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We may be unable to generate interest or meaningful revenue in out-license our Intellectual Property.
The results of preclinical studies may not correlate with the results of human clinical trials. In addition, early stage clinical trial results do not ensure
success in later stage clinical trials, and interim trial results are not necessarily predictive of final trial results.
To date, we have not completed the development of any products through regulatory approval. The results of preclinical studies in animals may not be
predictive of results in a clinical trial. Likewise, the outcomes of early clinical trials may not be predictive of the success of later clinical trials. New information
regarding the safety and efficacy of such product candidates may be less favorable than the data observed to date. AG’s budding technical service revenue in
the Jilin Hospital should not be relied upon as evidence that later or larger-scale clinical trials will succeed. In addition, even if the trials are successfully
completed, we cannot guarantee that the CFDA will interpret the results as we do, and more trials could be required before we submit our product candidates for
approval. To the extent that the results of the trials are not satisfactory to the CFDA or other foreign regulatory authorities for support of a marketing application,
approval of our product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to
us, to conduct additional trials in support of potential approval of our product candidates.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely
affected.
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with
their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of
patients depends on many factors, including:
● the patient eligibility criteria defined in the protocol;
● the size of the patient population required for analysis of the trial’s primary endpoints;
● the proximity of patients to study sites;
● the design of the trial;
● our ability to recruit clinical trial investigators with the appropriate competencies and experience;
● our ability to obtain and maintain patient consents; and
● the risk that patients enrolled in clinical trials will drop out of the trials before completion.
In addition, our clinical trials may compete with other clinical trials for product candidates that are in the same therapeutic areas as our product
candidates, and this competition may reduce the number and types of patients available to us, because some patients who might have opted to enroll in our
trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we expect to
conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for
our clinical trials in such clinical trial site. Moreover, because our product candidates represent a departure from more commonly used methods for cancer
treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy and or traditional Chinese medicine, rather
than enroll patients in any future clinical trial.
Upon commencing clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical
trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our product candidates.
We are exposed to general liability, non-clinical and clinical liability risks which could place a substantial financial burden upon us, should lawsuits
be filed against us.
Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of our therapies and product candidates.
We expect that such claims are likely to be asserted against us at some point. In addition, the use in our clinical trials of our therapies and products and the
subsequent sale of these therapies or product candidates by us or our potential collaborators may cause us to bear a portion of or all product liability risks. We
currently have insurance coverage relating to inventory, property plant and equipment and office premises. The Company also purchased in insurance covering
personal injury, medical expenses and several clinical trials. However, any claim under such insurance policies may be subject to certain exceptions, and may
not be honored fully, in part, in a timely manner, or at all, and may not cover the full extent of liability we may actually face. Therefore, a successful liability claim
or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
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We currently have no CAR-T or KOA product marketing and sales organization and have no experience in marketing such products. If we are unable
to establish product marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may
generate less product revenue than expected.
We currently have no CAR-T or KOA product sales, marketing or distribution capabilities and have no experience in marketing products. We intend to
develop an in-house product marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will
have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.
If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the
sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we
are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be
successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if
we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing
efforts of our product candidates. There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain
relationships with third-party collaborators to commercialize any product in China or overseas.
Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for
us to sell our product candidates profitably.
Successful sales of our product candidates, if approved, depend on the availability of adequate coverage and reimbursement from third-party payers. In
addition, because our product candidates represent new approaches to the treatment of cancer, we cannot accurately estimate the potential revenue from our
product candidates.
Patients who are provided medical treatment for their conditions generally rely on third-party payers to reimburse all or part of the costs associated with
their treatment. Adequate coverage and reimbursement from governmental healthcare programs and commercial payers is critical to new product acceptance. In
China, government authorities decide which drugs and treatments they will cover and the amount of reimbursement. Obtaining coverage and reimbursement
approval of a product from a government or other third-party payer is a time-consuming and costly process that could require us to provide to the payer
supporting scientific, clinical and cost-effectiveness data for the use of our products. Even if we obtain coverage for a given product, the resulting reimbursement
payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Patients are
unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product
candidates. If we obtain approval in one or more jurisdictions outside of China for our product candidates, we will be subject to rules and regulations in those
jurisdictions. In some foreign countries, particularly those in the EU, the pricing of biologics is subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take considerable time after obtaining marketing approval of a product candidate. In addition, market acceptance
and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payers for our product
candidates and may be affected by existing and future health care reform measures. The continuing efforts of the government, insurance companies, managed
care organizations and other payers of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:
● the demand for our product candidates, if we obtain regulatory approval;
● our ability to set a price that we believe is fair for our products;
● our ability to generate revenue and achieve or maintain profitability;
● the level of taxes that we are required to pay; and
● the availability of capital.
Any reduction in reimbursement from any government programs may result in a similar reduction in payments from private payers, which may adversely
affect our future profitability.
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Our product candidates may cause undesirable side effects or have other properties that could interrupt our clinical development, prevent or delay
regulatory approval, and limit our commercial value or result in significant negative consequences.
Undesirable or unacceptable side effects caused by our product candidates could cause us or regulatory authorities to delay, suspend or stop clinical
trials and could result in the delay or denial of regulatory approval by the regulatory authorities. Results of our trials could reveal unacceptable severe adverse
effects or unexpected characteristics.
There have been reported patient deaths in Immune Cell therapies as a result of factors comprised of cytokine release syndrome and neurotoxicity.
Immune Cell therapy treatment-related adverse side effects could also affect patient recruitment or the ability of enrolled subjects to complete the trial or result in
potential liability claims. In addition, these side effects may not be recognized or properly managed by the treating medical staff, as medical personnel do not
normally encounter in the general patient population toxicities resulting from personalized immune cell therapy. We plan to conduct training for the medical
personnel using immune cell therapy to understand the adverse side effect profile for our clinical trials and upon any commercialization of any immune cell
product candidates. Inability of the medical personnel in recognizing or managing immune cell therapy’s potential adverse side effects could result in patient
deaths. Any of these occurrences may harm our business, financial condition and prospects significantly.
Our manufacturing facilities are subject to extensive government regulation, and existing or future regulations may adversely affect our current or
future operations, increase our costs of operations, or require us to make additional capital expenditures.
Environmental advocacy groups and regulatory agencies in China have been focusing considerable attention on the industries’ potential role in climate
change. Stringent government safety, environmental and bio-hazardous materials disposal regulations at the city, provincial, and local level may have substantial
impact on our business and our third-party service providers. A number of complex laws, rules, orders, and interpretations govern environmental protection,
health, safety, land use, zoning, transportation, and related matters. The adoption of laws and regulations to implement controls of bio-hazardous material
disposal and environmental compliance, including the imposition of fees or taxes, could adversely affect the operations with which we do business. Among other
things, timeliness in navigating the compliance of these regulations may restrict our operations, our third-party service providers’ operations and adversely affect
our financial condition, results of operations, and cash flows by imposing conditions including, but not limited to new permits requirement, limitations or bans on
disposal or transportation of certain bio-hazardous materials or certain categories of materials. The Company has completed the environmental protection
compliance for its new Zhangjiang facility. The Company is in the process of applying for (i) environmental protection compliance for its new facility in Beijing and
(ii) update of the environmental protection permits for its Shanghai facility.
Technological and medical developments or improvements in conventional therapies could render the use of cell therapy and our services and
planned products obsolete.
Advances in other treatment methods or in disease prevention techniques could significantly reduce or entirely eliminate the need for our cell therapy
services, planned products and therapeutic efforts. There is no assurance that cell therapies will achieve the degree of success envisioned by us in the treatment
of disease. Nor is there any assurance that new technological improvements or techniques will not render obsolete the processes currently used by us, the need
for our services or our planned products. Additionally, technological or medical developments may materially alter the commercial viability of our technology or
services, and require us to incur significant costs to replace or modify equipment in which we have a substantial investment. We are focused on novel cell
therapies, and if this field is substantially unsuccessful, this could jeopardize our success or future results. The occurrence of any of these factors may have a
material adverse effect on our business, operating results and financial condition.
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We face significant competition from other Chinese biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to
compete effectively.
There is intense competition and rapid innovation in the Chinese cell therapy industry, and in the cancer immunotherapy space in particular. Our
competitors may be able to develop other herbal medicine, compounds or drugs that are able to achieve similar or better results. Our potential competitors are
comprised of traditional Chinese medicine companies, major multinational pharmaceutical companies, established and new biotechnology companies, specialty
pharmaceutical companies, state-owned enterprises, universities and other research institutions. Many of our competitors have substantially greater scientific,
financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-
established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with
large, established companies or are well funded by venture capitals. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in
even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of
technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in
developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than
our product candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and
products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety,
tolerability, reliability, and convenience of use, price and reimbursement.
Even if we obtain regulatory approval of our product candidates, the availability and price of our competitors’ products could limit the demand and the
price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product candidates is
inhibited by price competition or the reluctance of doctors to switch from existing methods of treatment to our product candidates, or if doctors switch to other
new drug or biologic products or choose to reserve our product candidates for use in limited circumstances.
We may be unable to attract or retain key employees for our business if our share-based or other compensation programs cease to be viewed as
competitive and valuable benefits.
To be competitive, we must attract, retain, and motivate executives and other key employees. Hiring and retaining qualified executives, scientists,
technical staff, and professional staff are critical to our business, and competition for experienced employees can be intense. To help attract, retain, and motivate
key employees, we use share-based and other performance-based incentive awards such as stock options, restricted stock units (RSUs) and cash bonuses. If
our share-based or other compensation programs cease to be viewed as competitive and valuable benefits, our ability to attract, retain, and motivate key
employees could be weakened, which could harm our results of operations.
There is a scarcity of experienced professionals in the field of cell therapy and we may not be able to retain key officers or employees or hire new key
officers or employees needed to implement our business strategy and develop our products. If we are unable to retain or hire key officers or
employees, we may be unable to grow our biopharmaceutical business or implement our business strategy, and the Company may be materially and
adversely affected.
Given the specialized nature of cell therapy and the fact that it is a young field, there is an inherent scarcity of experienced personnel in the field. The
Company is substantially dependent on the skills and efforts of current senior management, as well as recently acquired AG management and personnel, for
their management, operations and the implementation of their business strategy. As a result of the difficulty in locating qualified new management, the loss or
incapacity of existing members of management or unavailability of qualified management or as replacements for management who resign or are terminated
could adversely affect the Company’s operations. The future success of the Company also depends upon our ability to attract and retain additional qualified
personnel (including medical, scientific, technical, commercial, business and administrative personnel) necessary to support our anticipated growth, develop our
business, perform our contractual obligations to third parties and maintain appropriate licensure, on acceptable terms. There can be no assurance that we will be
successful in attracting or retaining personnel required by us to continue to grow our operations. The loss of a key employee, the failure of a key employee to
perform in his or her current position or our inability to attract and retain skilled employees, as needed, could result in our inability to grow our biopharmaceutical
business or implement our business strategy, or may have a material adverse effect on our business, financial condition and operating results.
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We may fail to successfully integrate our acquired businesses, operations and assets in the expected time frame, which may adversely affect the
combined company’s future results.
We believe that our acquisitions, including our CAR-T, Tcm and GVAX technologies, will result in certain benefits, including certain manufacturing, sales
and distribution and operational efficiencies. However, to realize these anticipated benefits, our existing business and the acquired technologies must be
successfully combined. We may be unable to effectively integrate the acquired technologies into our organization, make the acquired technologies profitable,
and may not succeed in managing the acquired technologies. The process of integration of an acquired technologies may subject us to a number of risks,
including:
● Failure to successfully manage relationships with hospitals, patients and suppliers;
● Demands on management related to the increase in complexity of the company after the acquisition;
● Diversion of management and scientists’ attention;
● Potential difficulties integrating and harmonizing large scale multi-site clinical trials;
● Difficulties in the assimilation and retention of employees;
● Exposure to legal claims for activities of the acquired technologies; and
● Incurrence of additional expenses in connection with the integration process.
If the acquired technologies is not successfully integrated into our company, our business, financial condition and results of operations could be
materially adversely affected, as well as our professional reputation. Furthermore, if we are unable to successfully integrate the acquired technologies, or if
there are delays in implementing clinical trials using the acquired technologies, the anticipated benefits of the acquisition may not be realized fully or at all or
may take longer to realize than expected. Successful integration of the acquired technologies will depend on our ability to manage large scale cancer clinical
trials and to realize opportunities in monetizing these technologies.
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As our development and commercialization plans and strategies develop, and as we continue to expand operation as a public company, we expect to
grow our personnel needs in the managerial, operational, sales, marketing, financial and other departments. Future growth would impose significant added
responsibilities on members of management, including:
● identifying, recruiting, integrating, maintaining and motivating additional employees;
● managing our internal development efforts effectively, including the clinical trials and CFDA review process for our product candidates, while
complying with our contractual obligations to contractors and other third parties; and
● improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage any
future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a
substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations such as contract research
organizations and hospitals to provide certain services comprised of regulatory approval and clinical management. There can be no assurance that the services
of independent organizations will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are
unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by the independent organizations is compromised for
any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or
otherwise advance our business. If we are not able to effectively expand our organization by hiring new employees, we may not be able to successfully
implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and
commercialization goals.
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We may form or seek strategic alliances or enter into licensing arrangements in the future, and we may not realize the benefits of such alliances or
licensing arrangements.
We may form or seek strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will
complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may
develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that
dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners
and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other
alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third
parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may
not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We
cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays
in entering into new strategic partnership agreements related to our product candidates could delay the development and commercialization of our product
candidates in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.
We, our strategic partners and our customers conduct business in a heavily regulated industry. If we or one or more of our strategic partners or
customers fail to comply with applicable current and future laws and government regulations, our business and financial results could be adversely
affected.
The healthcare industry is one of the most highly regulated industries. Federal governments, individual state and local governments and private
accreditation organizations may oversee and monitor all the activities of individuals and businesses engaged in the delivery of health care products and services.
Therefore, current laws, rules and regulations could directly or indirectly negatively affect our ability and the ability of our strategic partners and customers to
operate each of their businesses.
In addition, as we expand into other parts of the world, we will need to comply with the applicable laws and regulations in such foreign jurisdictions. We
have not yet thoroughly explored the requirements or feasibility of such compliance. It is possible that we may not be permitted to expand our business into one
or more foreign jurisdictions.
Although we intend to conduct our business in compliance with applicable laws and regulations, the laws and regulations affecting our business and
relationships are complex, and many aspects of such relationships have not been the subject of judicial or regulatory interpretation. Furthermore, the cell therapy
industry is the topic of significant government interest, and thus the laws and regulations applicable to us and our strategic partners and customers and to their
business are subject to frequent change and/or reinterpretation and there can be no assurance that the laws and regulations applicable to us and our strategic
partners and customers will not be amended or interpreted in a manner that adversely affects our business, financial condition, or operating results.
We anticipate that we will need substantial additional financing in the future to continue our operations; if we are unable to raise additional capital, as
and when needed, or on acceptable terms, we may be forced to delay, reduce or eliminate one or more of our product or therapy development
programs, cell therapy initiatives or commercialization efforts and our business will be harmed.
Our current operating plan will require significant levels of additional capital to fund, among other things, the continued development of our cell therapy
product or therapy candidates and the operation, and expansion of our manufacturing operations to our clinical development activities.
We have launched the early phase of CAR-T and KOA clinical trials in China. Supported by the CIRM grant, we plan to file for allogeneic KOA pre-
clinical trial application with the FDA in the second half of 2018, When approved by the FDA we plan to conduct allogeneic KOA clinical trial in the United
States. If these trials are successful, we will require significant additional investment capital over a multi-year period in order to conduct subsequent phases, gain
approval for these therapies by the MOH and CFDA, and to commercialize these therapies, if ever. Subsequent phases may be larger and more expensive than
the Phase I trials. In order to raise the necessary capital, we will need to raise additional money in the capital markets, enter into collaboration agreements with
third parties or undertake some combination of these strategies. If we are unsuccessful in these efforts, we may have no choice but to delay or abandon the
trials.
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The amount and timing of our future capital requirements also will likely depend on many other factors, including:
● the scope, progress, results, costs, timing and outcomes of our other cell therapy product or therapy candidates;
● our ability to enter into, or continue, any collaboration agreements with third parties for our product or therapy candidates and the timing and terms of
any such agreements;
● the timing of and the costs involved in obtaining regulatory approvals for our product or therapy candidates, a process which could be particularly
lengthy or complex given the lack of precedent for cell therapy products in China; and
● the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities.
To fund clinical studies and support our future operations, we would likely seek to raise capital through a variety of different public and/or private
financings vehicles. This could include, but not be limited to, the use of loans or issuances of debt or equity securities in public or private financings. If we raise
capital through the sale of equity, or securities convertible into equity, it would result in dilution to our then existing stockholders. Servicing the interest and
principal repayment obligations under debt facilities could divert funds that would otherwise be available to support clinical or commercialization activities. In
certain cases, we also may seek funding through collaborative arrangements, that would likely require us to relinquish certain rights to our technology or product
or therapy candidates and share in the future revenues associated with the partnered product or therapy.
Ultimately, we may be unable to raise capital or enter into collaborative relationships on terms that are acceptable to us, if at all. Our inability to obtain
necessary capital or financing to fund our future operating needs could adversely affect our business, results of operations and financial condition.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse
effect on our business and operating results.
It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures
required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and
implement appropriate additional internal controls, processes and reporting procedures.
If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal controls over financial reporting
or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial
statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.
In connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses”
in our internal controls as defined in standards established by the Public Company Accounting Oversight Board (“PCAOB”). A material weakness is a significant
deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a
misstatement of the financial statements that is more than inconsequential will not be prevented or detected.
During the year ended December 31, 2015, we made improvements in our internal control and have remediated the deficiencies identified in 2014. In
the event that future material weaknesses are identified, we will attempt to employ qualified personnel and adopt and implement policies and procedures to
address any material weaknesses we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires
us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a public company.
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Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to
implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting
obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management
evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual
management reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act.
Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading
price of our common stock.
The Company’s revenue may become subject to tightened regulation that may affect the Company’s financial condition.
Currently we are not generating any meaningful revenue, which revenue is currently primarily comprised of technical services relating to the preparation
of subset T Cell and clonality assay platform technology for treatment of cancers. Nonetheless our revenue may be subject to the risk of progressive regulatory
actions by the PRC government. From time to time there may also be adverse publicity relating to the practice of cell therapy treatments in China, which due to
the sensitive and experimental nature of the treatment, may trigger further governmental scrutiny. Any progressive regulatory action in China arising out of such
scrutiny may adversely affect the Company’s financial condition or cash flows.
Our operations are subject to risks associated with emerging markets.
RISKS RELATED TO OUR STRUCTURE
The Chinese economy is not well established and is only recently emerging and growing as a significant market for consumer goods and services.
Accordingly, there is no assurance that the market will continue to grow. Perceived risks associated with investing in China, or a general disruption in the
development of China’s markets could materially and adversely affect the business, operating results and financial condition of the Company.
A substantial portion of our assets are currently located in the PRC, and investors may not be able to enforce federal securities laws or their other
legal rights.
A substantial portion of our assets are located in the PRC. As a result, it may be difficult for investors in the U.S. to enforce their legal rights, to effect
service of process upon certain of our directors or officers or to enforce judgments of U.S. courts predicated upon civil liabilities and criminal penalties against
any of our directors and officers located outside of the U.S.
The PRC government has the ability to exercise significant influence and control over our operations in China.
In recent years, the PRC government has implemented measures for economic reform, the reduction of state ownership of productive assets and the
establishment of corporate governance practices in business enterprises. However, many productive assets in China are still owned by the PRC government. In
addition, the government continues to play a significant role in regulating industrial development by imposing business regulations. It also exercises significant
control over the country’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies.
There can be no assurance that China’s economic, political or legal systems will not develop in a way that becomes detrimental to our business, results
of operations and financial condition. Our activities may be materially and adversely affected by changes in China’s economic and social conditions and by
changes in the policies of the government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional
restrictions on currency conversion.
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Additional factors that we may experience in connection with having operations in China that may adversely affect our business and results of operations
include:
● our inability to enforce or obtain a remedy under any material agreements;
● PRC restrictions on foreign investment that could impair our ability to conduct our business or acquire or contract with other entities in the future;
● restrictions on currency exchange that may limit our ability to use cash flow most effectively or to repatriate our investment;
● fluctuations in currency values;
● cultural, language and managerial differences that may reduce our overall performance; and
● political instability in China.
Cultural, language and managerial differences may adversely affect our overall performance.
We have experienced difficulties in assimilating cultural, language and managerial differences with our subsidiaries in China. Personnel issues have
developed in consolidating management teams from different cultural backgrounds. In addition, language translation issues from time to time have caused
miscommunications. These factors make the management of our operations in China more difficult. Difficulties in coordinating the efforts of our U.S.-based
management team with our China-based management team may cause our business, operating results and financial condition to be materially and adversely
affected.
We may not be able to enforce our rights in China given certain features of its legal and judicial system.
China’s legal and judicial system may negatively impact foreign investors. The legal system in China is evolving rapidly, and enforcement of laws is
inconsistent. It may be impossible to obtain swift and equitable enforcement of laws or enforcement of the judgment of one court by a court of another
jurisdiction. China’s legal system is based on civil law or written statutes and a decision by one judge does not set a legal precedent that must be followed by
judges in other cases. In addition, the interpretation of Chinese laws may vary to reflect domestic political changes.
Since a significant portion of our operations are presently based in China, service of process on our business and officers may be difficult to effect within
the United States. Also, some of our assets are located outside the United States and any judgment obtained in the United States against us may not be
enforceable outside the United States.
There are substantial uncertainties regarding the interpretation and application to our business of PRC laws and regulations, since many of the rules and
regulations that companies face in China are not made public. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in
detrimental reliance by foreign investors. New laws and regulations that apply to future businesses may be applied retroactively to existing businesses. We
cannot predict what effect the interpretations of existing or new PRC laws or regulations may have on our business.
Our operations in China are subject to government regulation that limit or prohibit direct foreign investment, which may limit our ability to control
operations based in China.
The PRC government has imposed regulations in various industries, including medical research and the stem cell industry, that limit foreign investors’
equity ownership or prohibit foreign investments altogether in companies that operate in such industries. We are currently structured as a U.S. corporation
(Delaware) with subsidiaries and controlled entities in China. As a result of these regulations and the manner in which they may be applied or enforced, our
ability to control our existing operations based in China may be limited or restricted.
If the relevant Chinese authorities find us or any business combination to be in violation of any laws or regulations, they would have broad discretion in
dealing with such violation, including, without limitation: (i) levying fines; (ii) revoking our business and other licenses; (iii) requiring that we restructure our
ownership or operations; and (iv) requiring that we discontinue any portion or all of our business.
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We may suffer losses if we cannot utilize our assets in China.
The Company’s Shanghai and Wuxi laboratory facilities were originally intended for stem cell research and development, but has been equipped to
provide comprehensive cell manufacturing, collection, processing and storage capabilities to provide cells for clinical trials. If the Company does not determine to
renew the lease due to limitations on its utility under the new regulatory initiatives in China or otherwise, the Company may incur certain expenses in connection
with returning the premises to the landlord. Management believes it will be able to renew all leases without difficulty.
Restrictions on currency exchange may limit our ability to utilize our cash flow effectively.
Our interests in China will be subject to China’s rules and regulations on currency conversion. In particular, the initial capitalization and operating
expenses of the VIE (CBMG Shanghai) are funded by our WFOE, Cellular Biomedicine Group Ltd. (Wuxi). In China, the State Administration for Foreign
Exchange (the “SAFE”), regulates the conversion of the Chinese Renminbi into foreign currencies and the conversion of foreign currencies into Chinese
Renminbi. Foreign investment enterprises are allowed to open currency accounts including a “basic account” and “capital account.” However, conversion of
currency in the “capital account,” including capital items such as direct investments, loans, and securities, require approval of the SAFE even though according
to the Notice of the State Administration of Foreign Exchange on Reforming the Administration of the Settlement of Foreign Exchange Capital of Foreign-
invested Enterprise promulgated on April 8, 2015, or the SAFE Notice 19, and Notice of the State Administration of Foreign Exchange on Reforming and
Regulating the Policies for the Administration of Settlement of Foreign Exchange under Capital Accounts promulgated on June 9, 2016, or the SAFE Notice 16,
foreign-invested enterprises are able to settle foreign exchange capital at their discretion, Chinese banks restricts foreign currency conversion for fear of “hot
money” going into China and may continue to limit our ability to channel funds to the VIE entities for their operation. There can be no assurance that the PRC
regulatory authorities will not impose further restrictions on the convertibility of the Chinese currency. Future restrictions on currency exchanges may limit our
ability to use our cash flow for the distribution of dividends to our stockholders or to fund operations we may have outside of China, which could materially
adversely affect our business and operating results.
Fluctuations in the value of the Renminbi relative to the U.S. dollar could affect our operating results.
We prepare our financial statements in U.S. dollars, while our underlying businesses operate in two currencies, U.S. dollars and Chinese Renminbi. It is
anticipated that our Chinese operations will conduct their operations primarily in Renminbi and our U.S. operations will conduct their operations in dollars. At the
present time, we do not expect to have significant cross currency transactions that will be at risk to foreign currency exchange rates. Nevertheless, the
conversion of financial information using a functional currency of Renminbi will be subject to risks related to foreign currency exchange rate fluctuations. The
value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic
conditions and supply and demand in local markets. As we have significant operations in China, and will rely principally on revenues earned in China, any
significant revaluation of the Renminbi could materially and adversely affect our financial results. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse
effect on our business, financial condition and results of operations.
Some of the laws and regulations governing our business in China are vague and subject to risks of interpretation.
Some of the PRC laws and regulations governing our business operations in China are vague and their official interpretation and enforcement may
involve substantial uncertainty. These include, but are not limited to, laws and regulations governing our business and the enforcement and performance of our
contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Despite their uncertainty, we will be
required to comply.
New laws and regulations that affect existing and proposed businesses may be applied retroactively. Accordingly, the effectiveness of newly enacted
laws, regulations or amendments may not be clear. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our
business.
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The PRC government does not permit direct foreign investment in stem cell research and development businesses. Accordingly, we operate these
businesses through local companies with which we have contractual relationships but in which we do not have direct equity ownership.
PRC regulations prevent foreign companies from directly engaging in stem cell-related research, development and commercial applications in China.
Therefore, to perform these activities, we conduct much of our biopharmaceutical business operations in China through a domestic variable interest entity, or
VIE, a Chinese domestic company controlled by the Chinese employees of the Company. Our contractual arrangements may not be as effective in providing
control over these entities as direct ownership. For example, the VIE could fail to take actions required for our business or fail to conduct business in the manner
we desire despite their contractual obligation to do so. These companies are able to transact business with parties not affiliated with us. If these companies fail
to perform under their agreements with us, we may have to rely on legal remedies under PRC law, which may not be effective. In addition, we cannot be certain
that the individual equity owners of the VIE would always act in our best interests, especially if they have no other relationship with us.
Although other foreign companies have used VIE structures similar to ours and such arrangements are not uncommon in connection with business
operations of foreign companies in China in industry sectors in which foreign direct investments are limited or prohibited, recently there has been greater scrutiny
by the business community of the VIE structure and, additionally, the application of a VIE structure to control companies in a sector in which foreign direct
investment is specifically prohibited carries increased risks.
In addition, the Ministry of Commerce (“MOFCOM”), promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in August 2011, or the MOFCOM Security Review Rules, to implement the Notice of the
General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
promulgated on February 3, 2011, or Circular No. 6. The MOFCOM Security Review Rules came into effect on September 1, 2011 and replaced the Interim
Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors promulgated by MOFCOM in March 2011. According to these circulars and rules, a security review is required for mergers and
acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de
facto control” of domestic enterprises having “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction. The MOFCOM
Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts,
indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation
stating that our business falls into the scope subject to the security review, and there is no requirement for foreign investors in those mergers and acquisitions
transactions already completed prior to the promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. The enactment of the
MOFCOM National Security Review Rules specifically prohibits circumvention of the rules through VIE arrangement in the area of foreign investment in business
of national security concern. Although we believe that our business, judging from its scale, should not cause any concern for national security review at its
current state, there is no assurance that MOFCOM would not apply the same concept of anti-circumvention in the future to foreign investment in prohibited
areas through VIE structure, the same way that our investment in China was structured.
Our relationship with our controlled VIE entity, CBMG Shanghai, through the VIE agreements, is subject to various operational and legal risks.
Management believes the holders of the VIE’s registered capital, Messrs. Chen Mingzhe and Lu Junfeng, have no interest in acting contrary to the VIE
agreements. However, if Messrs. Chen or Lu as shareholders of the VIE entity were to reduce or eliminate their ownership of the registered capital of the VIE
entity, their interests may diverge from that of CBMG and they may seek to act in a manner contrary to the VIE agreements (for example by controlling the VIE
entity in such a way that is inconsistent with the directives of CBMG management and the board; or causing non-payment by the VIE entity of services fees). If
such circumstances were to occur the WFOE would have to assert control rights through the powers of attorney, pledges and other VIE agreements, which
would require legal action through the PRC judicial system. We believe based on the advice of local counsel that the VIE agreements are valid and in
compliance with PRC laws presently in effect. However, there is a risk that the enforcement of these agreements may involve more extensive procedures and
costs to enforce, in comparison to direct equity ownership of the VIE entity. Notwithstanding the foregoing, if the applicable PRC laws were to change or are
interpreted by authorities in the future in a manner which challenges or renders the VIE agreements ineffective, the WFOE’s ability to control and obtain all
benefits (economic or otherwise) of ownership of the VIE entity could be impaired or eliminated. In the event of such future changes or new interpretations of
PRC law, in an effort to substantially preserve our rights, we may have to either amend our VIE agreements or enter into alternative arrangements which comply
with PRC laws as interpreted and then in effect.
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Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to
these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. There can be no assurance,
however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are
found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business,
financial condition and results of operations.
If we make share compensation grants to persons who are PRC citizens, they may be required to register with SAFE. We may also face regulatory
uncertainties that could restrict our ability to adopt share compensation plans for our directors and employees and other parties under PRC laws.
On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership
Plan or Stock Option Plan of An Overseas Listed Company, also known as Circular 78. On February 15, 2012, SAFE promulgated the Circular on Relevant
Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in an Employees Share Incentive Plan of an Overseas-Listed
Company, often known as Circular 7. Circular 7 has superseded Circular 78. Under Circular 7, PRC resident individuals who participate in a share incentive plan
of an overseas listed company are required to register with SAFE and complete certain other procedures. All such participants need to retain a PRC agent
through PRC subsidiary to handle issues like foreign exchange registration, account opening, funds transfer and remittance. Circular 7 further requires that an
offshore agent should also be designated to handle matters in connection with the exercise or sale of share awards and proceeds transferring for the share
incentive plan participants. We have obtained the SAFE approvals under Circular 7 for one PRC subsidiary. If we or our PRC employees who have been granted
stock options fail to comply with these regulations, we or our PRC employees who have been granted stock options may be subject to fines and legal sanctions
and will be unable to grant share compensation to our PRC employees. In that case, our ability to compensate our employees and directors through share
compensation would be hindered and our business operations may be adversely affected.
The labor contract law and its implementation regulations may increase our operating expenses and may materially and adversely affect our
business, financial condition and results of operations.
Substantial uncertainty of the PRC Labor Contract Law, or Labor Contract Law, and the Implementation Regulation for the PRC Labor Contract Law, or
Implementation Regulation, remains as to their potential impact on our business, financial condition and results of operations. The implementation of the Labor
Contract Law and the Implementation Regulation may increase our operating expenses, in particular our human resources costs and our administrative
expenses. In addition, as the interpretation and implementation of these regulations are still evolving, we cannot assure you that our employment practices will at
all times be deemed to be in full compliance with the law. In the event that we decide to significantly modify our employment or labor policy or practice, or reduce
the number of our sales professionals, the Labor Contract Law and the Implementation Regulation may limit our ability to effectuate the modifications or changes
in the manner that we believe to be most cost-efficient or otherwise desirable, which could materially and adversely affect our business, financial condition and
results of operations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and
results of operations may be adversely affected.
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If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing the U.S. capital
markets.
At various times during recent years, the United States and China have had disagreements over trade, economic and other policy issues. Controversies
may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market
price of our common stock and our and our clients' ability to access U.S. capital markets.
PRC regulations of loans to PRC entities and direct investment in PRC entities by offshore holding companies may delay or prevent us from using
the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary.
We may transfer funds to our PRC subsidiary or finance our PRC subsidiary by means of shareholder loans or capital contributions. Any loans from us
to our PRC subsidiary, which is a foreign-invested enterprise, is subject to a quota based on the statutory formulas and there are two alternative applicable
quotas: the difference between the registered capital and total investment of the PRC subsidiary; certain times of the net asset value of PRC subsidiary
(currently up to twice of the net assets value), and shall be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Any
capital contributions we make to our PRC subsidiary shall be approved by or registered with (as the case may be) the Ministry of Commerce or its local
counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or
approvals, our ability to provide loans or capital contributions to our PRC subsidiary in a timely manner may be negatively affected, which could materially and
adversely affect our liquidity and our ability to fund and expand our business.
In addition, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business
scope approved by the applicable governmental authority. Foreign-invested companies may not change how they use such capital without SAFE’s approval, and
may not in any case use such capital to repay RMB loans if proceeds of such loans have not been utilized. Violations of these regulations may result in severe
penalties. These regulations may significantly limit our ability to transfer the net proceeds from offshore offering and subsequent offerings or financings to our
PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China.
We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiary and our PRC subsidiary’s ability to
distribute profits to us, if our PRC resident shareholders beneficial owners fail to comply with relevant PRC foreign exchange rules.
The Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via
Offshore Special Purpose Vehicles, often known as Circular 75, was issued by SAFE in 2005. Circular 75 requires PRC residents to register with the local SAFE
branch in connection with their establishment or control of any offshore special purpose vehicle for the purpose of overseas equity financing involving a roundtrip
investment whereby the offshore special purpose vehicle acquires or controls onshore assets or equity interests held by the PRC residents. On July 4, 2014,
SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Outbound Investment and Financing
and Inbound Investment via Special Purpose Vehicles, or Circular 37, which has superseded Circular 75. Under Circular 37 and other relevant foreign exchange
regulations, PRC residents who make, or have made, prior to the implementation of these foreign exchange regulations, direct or indirect investments in offshore
companies are required to register those investments with SAFE. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is
also required to file or update the registration with SAFE, with respect to that offshore company for any material change involving its round-trip investment,
capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or the creation of
any security interest. If any PRC shareholder fails to make the required registration or update the registration, the PRC subsidiary of that offshore company may
be prohibited from distributing its profits and the proceeds from any reduction in capital, share transfer or liquidation to that offshore company, and that offshore
company may also be prohibited from injecting additional capital into its PRC subsidiary. Moreover, failure to comply with the foreign exchange registration
requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
We cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents have fully complied or will obtain or update
any applicable registrations or have fully complied or will fully comply with other requirements required by Circular 37 or other related rules in a timely manner.
The failure or inability of our shareholders resident in China to comply with the registration requirements set forth therein may subject them to fines and legal
sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits and other
proceeds to our company or otherwise adversely affect our business.
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We and/or our Hong Kong subsidiary may be classified as a “PRC resident enterprise” for PRC enterprise income tax purposes. Such classification
would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of
operations and the value of your investment.
The Enterprise Income Tax Law provides that an enterprise established outside China whose “de facto management body” is located in China is
considered a “PRC resident enterprise” and will generally be subject to the uniform 25% enterprise income tax on its global income. Under the implementation
rules of the Enterprise Income Tax Law, “de facto management body” is defined as the organizational body which effectively manages and controls the
production and business operation, personnel, accounting, properties and other aspects of operations of an enterprise.”
Pursuant to the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the
Basis of De Facto Management Bodies, issued by the State Administration of Taxation in 2009, a foreign enterprise controlled by PRC enterprises or PRC
enterprise groups is considered a PRC resident enterprise if all of the following conditions are met: (i) the senior management and core management
departments in charge of daily operations are located mainly within the PRC; (ii) financial and human resources decisions are subject to determination or
approval by persons or bodies in the PRC; (iii) major assets, accounting books, company seals and minutes and files of board and shareholders’ meetings are
located or kept within the PRC; and (iv) at least half of the enterprise’s directors with voting rights or senior management reside within the PRC. Although the
notice states that these standards only apply to offshore enterprises that are controlled by PRC enterprises or PRC enterprise groups, such standards may
reflect the general view of the State Administration of Taxation in determining the tax residence of foreign enterprises.
We believe that neither our company nor our Hong Kong subsidiary is a PRC resident enterprise because neither our company nor our Hong Kong
subsidiary meets all of the conditions enumerated. For example, board and shareholders’ resolutions of our company and our Hong Kong subsidiary are adopted
in Hong Kong and the minutes and related files are kept in Hong Kong. However, if the PRC tax authorities were to disagree with our position, our company
and/or our Hong Kong subsidiary may be subject to PRC enterprise income tax reporting obligations and to a 25% enterprise income tax on our global taxable
income, except for our income from dividends received from our PRC subsidiary, which may be exempt from PRC tax. If we and/or our Hong Kong subsidiary
are treated as a PRC resident enterprise, the 25% enterprise income tax may adversely affect our ability to satisfy any of our cash needs.
In addition, if we were to be classified as a PRC “resident enterprise” for PRC enterprise income tax purpose, dividends we pay to our non-PRC
enterprise shareholders and gains derived by our non-PRC shareholders from the sale of our shares and ADSs may be become subject to a 10% PRC
withholding tax. In addition, future guidance may extend the withholding tax to dividends we pay to our non-PRC individual shareholders and gains derived by
such shareholders from transferring our shares and ADSs. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also
possible that the rules may change in the future, possibly with retroactive effect. If PRC income tax were imposed on gains realized through the transfer of our
ADSs or ordinary shares or on dividends paid to our non-resident shareholders, the value of your investment in our ADSs or ordinary shares may be materially
and adversely affected.
Any limitation on the ability of our PRC subsidiary to make payments to us, or the tax implications of making payments to us, could have a material
adverse effect on our ability to conduct our business or our financial condition.
We are a holding company, and we rely principally on dividends and other distributions from our PRC subsidiary for our cash needs, including the funds
necessary to pay dividends to our shareholders or service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends only out
of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set
aside at least 10% of its after tax profits each year, if any, to fund certain statutory reserve funds until the aggregate amount of such reserve funds reaches 50%
of its registered capital. Apart from these reserves, our PRC subsidiary may allocate a discretionary portion of its after-tax profits to staff welfare and bonus funds
at its discretion. These reserves and funds are not distributable as cash dividends. Furthermore, if our PRC subsidiary incurs debt, the debt instruments may
restrict its ability to pay dividends or make other payments to us. We cannot assure you that our PRC subsidiary will generate sufficient earnings and cash flows
in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.
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Distributions made by PRC companies to their offshore parents are generally subject to a 10% withholding tax under the Enterprise Income Tax Law.
Pursuant to the Enterprise Income Tax Law and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, the withholding tax rate on dividends paid by our PRC
subsidiary to our Hong Kong subsidiary would generally be reduced to 5%, provided that our Hong Kong subsidiary is the beneficial owner of the PRC sourced
income. Our PRC subsidiary has not obtained approval for a withholding tax rate of 5% from the local tax authority and does not plan to obtain such approval in
the near future as we have not achieved profitability. However, the Notice on How to Understand and Determine the Beneficial Owners in a Tax Agreement, also
known as Circular 601, promulgated by the State Administration of Taxation in 2009, provides guidance for determining whether a resident of a contracting state
is the “beneficial owner” of an item of income under China’s tax treaties and similar arrangements. According to Circular 601, a beneficial owner generally must
be engaged in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty
benefits. For this purpose, a conduit company is a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits.
Although our PRC subsidiary is wholly owned by our Hong Kong subsidiary, we will not be able to enjoy the 5% withholding tax rate with respect to any
dividends or distributions made by our PRC subsidiary to its parent company in Hong Kong if our Hong Kong subsidiary is regarded as a “conduit company.”
In addition, if CBMG HK were deemed to be a PRC resident enterprise, then any dividends payable by CBMG HK to CBMG Delaware Corporation may
become subject to PRC dividend withholding tax.
A new China taxation rule about the “beneficial owner” in a tax agreement will be effective from April 1, 2018 which will supersede Circular 601 and could
affect the determination of whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and similar
arrangements.
Restrictions on the remittance of RMB into and out of China and governmental control of currency conversion may limit our ability to pay dividends
and other obligations, and affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and the remittance of currency out of China. We receive
substantially all of our revenues in RMB and substantially all of our cash inflows and outflows are denominated in RMB. Under our current corporate structure,
our revenues are primarily derived from dividend payments from our subsidiary in China after it receives payments from the VIE under various service and other
contractual arrangements. We may convert a portion of our revenues into other currencies to meet our foreign currency obligations, such as payments of
dividends declared in respect of our ordinary shares, if any. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit
sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations.
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and
service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements
are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine
procedural requirements. However, approval from or registration with competent government authorities is required where the RMB is to be converted into
foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government
may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from
obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders,
including the U.S. shareholders.
Our financial condition and results of operations could be materially and adversely affected if recent value added tax reforms in the PRC become
unfavorable to our PRC subsidiary or VIE.
In 2012, China introduced a value added tax, or VAT, to replace the previous 5% business tax. Our PRC subsidiary and the VIE have been subject to
VAT at a base rate of 6% since September 1, 2012. The VIE’s subsidiary has been subject to VAT at a base rate of 6% since July 1, 2013. Our financial condition
and results of operations could be materially and adversely affected if the interpretation and enforcement of these tax rules become materially unfavorable to our
PRC subsidiary and VIE.
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Failure to comply with PRC regulations regarding the registration requirements for stock ownership plans or stock option plans may subject PRC
plan participants or us to fines and other legal or administrative sanctions.
Under SAFE regulations, PRC residents who participate in an employee stock ownership plan or stock option plan in an overseas publicly listed
company are required to register with SAFE or its local branch and complete certain other procedures. Participants of a stock incentive plan who are PRC
residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company, to conduct the SAFE registration and
other procedures with respect to the stock incentive plan on behalf of these participants. Such participants must also retain an overseas entrusted institution to
handle matters in connection with their exercise or sale of stock options. In addition, the PRC agent is required to amend the SAFE registration with respect to
the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material
changes.
We and our PRC resident employees who participate in our share incentive plans are subject to these regulations as our company is publicly listed in the
United States. We have obtained the SAFE approvals regarding our PRC resident employees participating in our share incentive plans. If we or any our PRC
resident option grantees fail to follow the compliance with above regulations, we or our PRC resident option grantees may be subject to fines and other legal or
administrative sanctions.
Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and China’s
foreign exchange policies, among other things. On July 21, 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the
U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation
halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. The PRC government has allowed the RMB to appreciate
slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. It is difficult to predict how market forces or PRC or U.S.
government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. In addition, there remains significant international pressure
on the PRC government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB against the
U.S. dollar. In 2015, due to the slow-down of China economic growth rate and environment, RMB depreciated against the U.S. dollar from third quarter.
Our revenues and costs are mostly denominated in RMB, and a significant portion of our financial assets are also denominated in RMB, whereas our
reporting currency is the U.S. dollar. Any significant depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position as
reported in U.S. dollars. To the extent that we need to convert U.S. dollars we received from this offering into RMB for our operations, appreciation of the RMB
against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB
into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against
the RMB would have a negative effect on the U.S. dollar amount available to us.
PRC laws and regulations establish more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it
more difficult for us to pursue growth through acquisitions in China.
A number of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors adopted by
six PRC regulatory agencies in 2006, or the M&A Rules, the Anti-monopoly Law, and the Rules of Ministry of Commerce on Implementation of Security Review
System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the Ministry of Commerce in August 2011, or the Security
Review Rules, have established procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more
time consuming and complex. These include requirements in some instances that the Ministry of Commerce be notified in advance of any change of control
transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in
circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and
regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.
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The Security Review Rules were formulated to implement the Notice of the General Office of the State Council on Establishing the Security Review
System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known as Circular 6, which was promulgated in 2011. Under these rules,
a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by
which foreign investors may acquire the “de facto control” of domestic enterprises have “national security” concerns. In addition, when deciding whether a
specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the Ministry of Commerce will look into the substance
and actual impact of the transaction. The Security Review Rules further prohibits foreign investors from bypassing the security review requirement by structuring
transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
There is no requirement for foreign investors in those mergers and acquisitions transactions already completed prior to the promulgation of Circular 6 to
submit such transactions to the Ministry of Commerce for security review. As we have already obtained the “de facto control” over our affiliated PRC entities prior
to the effectiveness of these rules, we do not believe we are required to submit our existing contractual arrangements to the Ministry of Commerce for security
review.
However, as these rules are relatively new and there is a lack of clear statutory interpretation on the implementation of the same, there is no assurance
that the Ministry of Commerce will not apply these national security review-related rules to the acquisition of equity interest in our PRC subsidiary. If we are
found to be in violation of the Security Review Rules and other PRC laws and regulations with respect to the merger and acquisition activities in China, or fail to
obtain any of the required approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines,
confiscating our income, revoking our PRC subsidiary’s business or operating licenses, requiring us to restructure or unwind the relevant ownership structure or
operations. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial
condition and results of operations. Further, if the business of any target company that we plan to acquire falls into the ambit of security review, we may not be
able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our
business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such
transactions could be time consuming, and any required approval processes, including approval from the Ministry of Commerce, may delay or inhibit our ability
to complete such transactions, which could affect our ability to expand our business or maintain our market share.
On July 30, 2017, MOFCOM issued the Interim Measures on Filing Administration of Establishment and Changes of Foreign-Invested Enterprises (2017
Revision) which came into force as of July 30, 2017. It is stipulated in the Interim Measures that the transformation of a non-foreign invested enterprise into a
foreign invested enterprise through M&A, merger by absorption, foreign investor’s strategic investment into non-foreign invested listed company, etc. would no
longer be subject to MOFCOM approval, but instead would only need to undergo the simplified filing procedures with MOFCOM, in case the business of the
target enterprise does not fall into the foreign investment negative list. But, if any business of the target enterprise falls into the foreign investment negative list,
the complex procedures for an acquisition of the target enterprise by foreign investors would be still applicable.
The heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our business operations, our
acquisition or restructuring strategy or the value of your investment in us.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698,
issued by the State Administration of Taxation in December 2009 with retroactive effect from January 1, 2008, where a non-PRC resident enterprise transfers
the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company, or an Indirect
Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate of less than 12.5% or (ii) does not impose income
tax on foreign income of its residents, the non-PRC resident enterprise, being the transferor, must report to the competent tax authority of the PRC resident
enterprise this Indirect Transfer and may be subject to PRC enterprise income tax of up to 10% of the gains derived from the Indirect Transfer in certain
circumstances.
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To clarify the issues related to Circular 698, the State Administration of Taxation released the Announcement of the State Administration of Taxation on
Several Issues Relating to the Administration of Income Tax on Non-resident Enterprises in 2011, known as Notice 24, and the Announcement on Issues
Related to Applications of Special Tax Treatment for Equity Transfer by Non-resident Enterprises in 2013.
On February 3, 2015, the State Administration of Taxation issued the Announcement on Several Issues Concerning the Enterprise Income Tax on
Indirect Property Transfers by Non-PRC Resident Enterprises, or Notice 7. Notice 7 introduces a new tax regime that is significantly different from that under
Circular 698. It superseded the previous tax rules in relation to the offshore indirect equity transfer, including those under Circular 698 as described above. It
extends the tax jurisdiction of State Administration of Taxation to capture not only the Indirect Transfer but also the transactions involving indirect transfer of (i)
real properties in China and (ii) assets of an “establishment or place” situated in China, by a non-PRC resident enterprise through a disposition of equity interests
in an overseas holding company.
However, Notice 7 also brings uncertainties to the parties of the offshore indirect transfers as the transferee and the transferor have to make self-
assessment on whether the transactions should be subject to the corporate income tax and file or withhold the corporate income tax accordingly. In addition, the
PRC tax authorities have discretion under Notice 7 to adjust the taxable capital gains based on the difference between the fair value of the transferred equity
interests and the investment cost. We may pursue acquisitions in the future that may involve complex corporate structures. If we are considered as a non-PRC
resident enterprise under the EIT Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under Notice 7, our income tax
expenses associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
We face certain risks relating to the real properties that we lease.
We primarily lease office and manufacturing space from third parties for our operations in China. Any defects in lessors’ title to the leased properties
may disrupt our use of our offices, which may in turn adversely affect our business operations. For example, certain buildings and the underlying land are not
allowed to be used for industrial or commercial purposes without relevant authorities’ approval, and the lease of such buildings to companies like us may subject
the lessor to pay premium fees to the PRC government. We cannot assure you that the lessor has obtained all or any of approvals from the relevant
governmental authorities. In addition, some of our lessors have not provided us with documentation evidencing their title to the relevant leased properties. We
cannot assure you that title to these properties we currently lease will not be challenged. In addition, we have not registered any of our lease agreements with
relevant PRC governmental authorities as required by PRC law, and although failure to do so does not in itself invalidate the leases, we may not be able to
defend these leases against bona fide third parties.
As of the date of this filing, we are not aware of any actions, claims or investigations being contemplated by government authorities with respect to the
defects in our leased real properties or any challenges by third parties to our use of these properties. However, if third parties who purport to be property owners
or beneficiaries of the mortgaged properties challenge our right to use the leased properties, we may not be able to protect our leasehold interest and may be
ordered to vacate the affected premises, which could in turn materially and adversely affect our business and operating results.
Our significant deposits in certain banks in China may be at risk if these banks go bankrupt or otherwise do not have the liquidity to pay us during
our deposit period.
As of December 31, 2017, we had approximately $22 million in cash and bank deposits, such as time deposits, with large domestic banks in China. Our
remaining cash, cash equivalents and short-term investments were held by financial institutions in the United States and Hong Kong. The terms of these
deposits are, in general, up to twelve months. Historically, deposits in Chinese banks were viewed as secure due to the state policy on protecting depositors’
interests. However, the new Bankruptcy Law that came into effect in 2007 contains an article expressly stating that the State Council may promulgate
implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law, so the law contemplates the possibility that a Chinese bank may
go bankrupt. In addition, foreign banks have been gradually permitted to operate in China since China’s accession to the World Trade Organization and have
become strong competitors of Chinese banks in many respects, which may have increased the risk of bankruptcy or illiquidity for Chinese banks, including those
in which we have deposits. In the event of bankruptcy or illiquidity of any one of the banks which holds our deposits, we are unlikely to claim our deposits back in
full since we are unlikely to be classified as a secured creditor based on PRC laws.
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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public
Company Accounting Oversight Board, and consequently investors may be deprived of the benefits of such inspection.
Our auditor, the independent registered public accounting firm that issued the audit reports included elsewhere in this report, as an auditor of companies
that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required
by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and applicable
professional standards. Our auditor is located in China and the PCAOB is currently unable to conduct inspections on auditors in China without the approval of
the PRC authorities. Therefore, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by the
PCAOB.
In May 2013, the PCAOB announced that it has entered into a Memorandum of Understanding (“MOU”) on Enforcement Cooperation with the China
Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance (the “MOF”). The MOU establishes a cooperative framework between the parties for
the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. More specifically, it provides a mechanism
for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties. In addition
to developing enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit joint inspections in China of audit
firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality
control procedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to
conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and
quality control procedures, investors may be deprived of such benefits.
On November 18, 2016, the PCAOB issued its 2016 to 2020 Strategic Plan on improving the quality of the audit for the protection and benefits of
investors, which revised the plan to update initiatives relating to the PCAOB’s new standard-setting process, planning for and adopting a permanent broker-
dealer inspection program, inspecting firms located in China, audit quality indicators, monitoring and developing reports related to independence and the
business model of the firms, and business continuity. This may eventually improve PCAOB’s ability to conduct inspections of independent registered public
accounting firms operating in China.
RISKS RELATED TO OUR COMMON STOCK
If we fail to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely
affect the market liquidity of our common stock, impair the value of your investment, adversely affect our ability to raise needed funds and subject us
to additional trading restrictions and regulations.
Our common stock trades on the Nasdaq Global Market. If we fail to satisfy the continued listing requirements of The Nasdaq Global Market, such as
the corporate governance requirements or the minimum closing bid price requirement, The Nasdaq Stock Market (or Nasdaq) may take steps to de-list our
common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our
common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq's listing requirements, but we
can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the
liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with
Nasdaq's listing requirements.
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If we fail to meet all applicable Nasdaq requirements and Nasdaq delists our securities from trading on its exchange, we expect our securities could be
quoted on the Over-The-Counter Bulletin Board ("OTCBB") or the "pink sheets." If this were to occur, we could face significant material adverse consequences,
including:
● a limited availability of market quotations for our securities;
● reduced liquidity for our securities;
● a determination that our common stock is "penny stock" which will require brokers trading in our common stock to adhere to more stringent rules and
possibly result in a reduced level of trading activity in the secondary trading market for our securities;
● a limited amount of news and analyst coverage; and
● a decreased ability to issue additional securities or obtain additional financing in the future.
Furthermore, The National Securities Markets Improvement Act of 1996 ("NSMIA"), which is a federal statute, prevents or preempts the states from
regulating the sale of certain securities, which are referred to as "covered securities." Because our common stock is listed on Nasdaq, they are covered
securities for the purpose of NSMIA. If our securities were no longer listed on Nasdaq and therefore not "covered securities", we would be subject to regulation in
each state in which we offer our securities.
We do not intend to pay cash dividends .
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends.
Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and
amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations,
cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that
we will pay any dividends in the future, and, if dividends are declared, there is no assurance with respect to the amount of any such dividend.
Our operating history and lack of profits could lead to wide fluctuations in our share price. The market price for our common shares is particularly
volatile given our status as a relatively unknown company with a small and thinly traded public float.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as
noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares
by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer
which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or "risky" investment due to our limited operating
history and lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares,
regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at
any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of
common shares for sale at any time will have on the prevailing market price.
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ITEM 2. PROPERTIES
Our corporate headquarters are located at 19925 Stevens Creek Blvd., Suite 100 in Cupertino, California. On January 1, 2017, CBMG Shanghai
entered into a 10-year lease agreement with Shanghai Chuangtong Industrial Development Co., Ltd., pursuant to which the Company leased a 10,501.6 square
meter building located in the “Pharma Valley” of Shanghai, the People’s Republic of China for research and development, manufacturing and office space
purposes. Subject to a 5-month rent-free renovation period, the monthly rent for the first two years is determined by floor and ranges from 3.7 yuan to 4.3 yuan
per square meter per day, for an aggregate monthly rent for the entire Property of approximately 1.3 million yuan ($203,000). The term of the Lease is 10 years,
starting from January 1, 2017 and ending on December 31, 2026 (the “Original Term”). During the Original Term, the monthly rent will increase by 6% every two
years. We currently pay rent for a total of $268,000 per month for an aggregate of approximately 177,000 square feet of space to house our administration,
research and manufacturing facilities in Maryland and in the cities of Wuxi, Beijing and Shanghai in China.
ITEM 3. LEGAL PROCEEDINGS
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the Nasdaq Global Market under the symbol "CBMG." Our stock was formerly quoted under the symbol “EBIG.”
As of February 11, 2018, there were 17,430,762 and 17,003,968 shares of common stock of the Company issued and outstanding, respectively, and
there were approximately 1,700 stockholders of record of the Company's common stock.
The following table sets forth for the periods indicated the high and low bid quotations for the Company's common stock. These quotations represent
inter-dealer quotations, without adjustment for retail markup, markdown or commission and may not represent actual transactions.
Fiscal Year 2017
First Quarter (January – March 2017)
Second Quarter (April – June 2017)
Third Quarter (July – September 2017)
Fourth Quarter (October – December 2017)
Fiscal Year 2016
First Quarter (January – March 2016)
Second Quarter (April – June 2016)
Third Quarter (July – September 2016)
Fourth Quarter (October – December 2016)
High
Low
$
$
$
$
$
$
$
$
13.80
12.50
11.30
11.80
$
$
$
$
22.10
20.98
15.68
15.45
$
$
$
$
10.05
5.05
8.30
9.25
10.44
11.07
11.85
11.00
Effective January 18, 2013, the Company completed its reincorporation from the State of Arizona to the State of Delaware (the “Reincorporation”). In
connection with the Reincorporation, shares of the former Arizona entity were exchanged into shares of the Delaware entity at a ratio of 100 Arizona shares for
each 1 Delaware share, resulting in the same effect as a 1:100 reverse stock split. The Reincorporation became effective on January 31, 2013. Please refer to
the Current Report on Form 8-K, filed by the Company on January 25, 2013. All values have been retroactively adjusted.
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Dividends
We did not declare any cash dividends for the years ended December 31, 2017, 2016 and 2015. Our Board of Directors does not intend to declare any
dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will
depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the
Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to
the amount of any such dividend.
Equity Compensation Plans
2009 Stock Option Plan
During the first quarter of 2009, the Company's Board of Directors approved and adopted the 2009 Stock Option Plan (the "Plan") and designated
100,000 of its common stock for issuance under the Plan to employees, directors or consultants for the Company through either the issuance of shares or stock
option grants. Under the terms of the Plan, stock option grants shall be made with exercise prices not less than 100% of the fair market value of the shares of
common stock on the grant date. There are 4,593 shares available for issuance under this plan as of December 31, 2017.
2011 Incentive Stock Option Plan (as amended)
During the last quarter of 2011, the Company's Board of Directors approved and adopted the 2011 Incentive Plan (the "2011 Plan") and designated
300,000 of its no par common stock for issuance under the 2011 Plan to employees, directors or consultants for the Company through either the issuance of
shares or stock option grants. Under the terms of the 2011 Plan, stock option grants were authorized to be made with exercise prices not less than 100% of the
fair market value of the shares of common stock on the grant date. On November 30, 2012, the Company’s Board of Directors approved the Amended and
Restated 2011 Incentive Stock Option Plan (the “Restated Plan”), which amended and restated the 2011 Plan to provide for the issuance of up to 780,000
(increasing up to 1% per year) shares of common stock. The Restated Plan was approved by our stockholders on January 17, 2013. There are 25,777 shares
available for issuance under this plan as of December 31, 2017.
2013 Stock Incentive Plan
On August 29, 2013, the Company’s Board of Directors adopted the Cellular Biomedicine Group, Inc. 2013 Stock Incentive Plan (the “2013 Plan”) to
attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the
Company’s business. The 2013 Plan was approved by our stockholders on December 9, 2013. There are 47,714 shares available for issuance under this plan as
of December 31, 2017.
The following summary describes the material features of the 2013 Plan. The summary, however, does not purport to be a complete description of all
the provisions of the 2013 Plan. The following description is qualified in its entirety by reference to the Plan.
Description of the 2013 Plan
The purpose of the 2013 Plan is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants
and to promote the success of the Company’s business. The Company has reserved up to one million (1,000,000) of the authorized but unissued or reacquired
shares of common stock of the Company. The Board or its appointed administrator has the power and authority to grant awards and act as administrator
thereunder to establish the grant terms, including the grant price, vesting period and exercise date.
Each sale or award of shares under the 2013 Plan is made pursuant to the terms and conditions provided for in an award agreement (an “ Award
Agreement”) entered into by the Company and the individual recipient. The number of shares covered by each outstanding Award Agreement shall be
proportionately adjusted for (a) any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the common stock, or similar transaction affecting the common stock or (b) any other increase or decrease in the
number of issued shares of common stock effected without receipt of consideration by the Company.
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Under the 2013 Plan, the Board or its administrator have the authority to: (i) to select the employees, directors and consultants to whom awards may be
granted from time to time hereunder; (ii) to determine whether and to what extent awards are granted; (iii) to determine the number of shares or the amount of
other consideration to be covered by each award granted; (iv) to approve forms of Award Agreements for use under the 2013 Plan; (v) to determine the terms
and conditions of any award granted; (vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford grantees favorable treatment under such rules or laws; provided, however, that no award shall be granted under any such additional
terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the 2013 Plan; (vii) to amend the terms of any
outstanding award granted under the 2013 Plan, provided that any amendment that would adversely affect the grantee’s rights under an outstanding award shall
not be made without the grantee’s written consent; (viii) to construe and interpret the terms of the 2013 Plan and awards, including without limitation, any notice
of award or Award Agreement, granted pursuant to the 2013 Plan; (ix) to take such other action, not inconsistent with the terms of the 2013 Plan, as the
administrator deems appropriate.
The awards under the 2013 Plan other than Incentive Stock Options (“ISOs”) may be granted to employees, directors and consultants. ISOs may be
granted only to Employees of the Company, a parent or a subsidiary. An employee, director or consultant who has been granted an award may, if otherwise
eligible, be granted additional awards. Awards may be granted to such employees, directors or consultants who are residing in foreign jurisdictions as the
administrator may determine from time to time. Options granted under the 2013 Plan will be subject to the terms and conditions established by the
administrator. Under the terms of the 2013 Plan, the exercise price of the options will not be less than the fair market value (as determined under the 2013
Plan) of our common stock at the time of grant. Options granted under the 2013 Plan will be subject to such terms, including the exercise price and the
conditions and timing of exercise, as may be determined by the administrator and specified in the applicable award agreement. The maximum term of an option
granted under the 2013 Plan will be ten years from the date of grant. Payment in respect of the exercise of an option may be made in cash, by certified or
official bank check, by money order or with shares, pursuant to a “cashless” or “net issue” exercise, by a combination thereof, or by such other method as the
administrator may determine to be appropriate and has been included in the terms of the option.
The 2013 Plan may be amended, suspended or terminated by the Board, or an administrator appointed by the Board, at any time and for any reason.
2014 Stock Incentive Plan
On September 22, 2014, the Company’s Board of Directors adopted the Cellular Biomedicine Group, Inc. 2014 Stock Incentive Plan (the “2014 Plan”)
covering 1.2 million shares to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to
promote the success of the Company’s business. The 2014 Plan was approved by our stockholders on November 7, 2014. In 2017 the Company’s Board of
Directors approved the Amended and Restated 2014 Incentive Stock Option Plan (the “Restated Plan”), which amended and restated the 2014 Plan to increase
the number of shares available for issuance by 1,000,000 shares. The Restated Plan was approved by our stockholders on April 28, 2017. There are 961,272
shares available for issuance under this plan as of December 31, 2017.
The following summary describes the material features of the 2014 Plan. The summary, however, does not purport to be a complete description of all
the provisions of the 2014 Plan. The following description is qualified in its entirety by reference to the Plan.
Description of the 2014 Plan
The purpose of the 2014 Plan is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants
and to promote the success of the Company’s business. The Company has reserved up to 1.2 million (1,200,000) of the authorized but unissued or reacquired
shares of common stock of the Company. The Board or its appointed administrator has the power and authority to grant awards and act as administrator
thereunder to establish the grant terms, including the grant price, vesting period and exercise date.
Each sale or award of shares under the 2014 Plan is made pursuant to the terms and conditions provided for in an award agreement (an “ Award
Agreement”) entered into by the Company and the individual recipient. The number of shares covered by each outstanding Award Agreement shall be
proportionately adjusted for (a) any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the common stock, or similar transaction affecting the common stock or (b) any other increase or decrease in the
number of issued shares of common stock effected without receipt of consideration by the Company.
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Under the 2014 Plan, the Board or its administrator have the authority to: (i) to select the employees, directors and consultants to whom awards may be
granted from time to time hereunder; (ii) to determine whether and to what extent awards are granted; (iii) to determine the number of shares or the amount of
other consideration to be covered by each award granted; (iv) to approve forms of Award Agreements for use under the 2014 Plan; (v) to determine the terms
and conditions of any award granted; (vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford grantees favorable treatment under such rules or laws; provided, however, that no award shall be granted under any such additional
terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the 2014 Plan; (vii) to amend the terms of any
outstanding award granted under the 2014 Plan, provided that any amendment that would adversely affect the grantee’s rights under an outstanding award shall
not be made without the grantee’s written consent; (viii) to construe and interpret the terms of the 2014 Plan and awards, including without limitation, any notice
of award or Award Agreement, granted pursuant to the 2014 Plan; (ix) to take such other action, not inconsistent with the terms of the 2014 Plan, as the
administrator deems appropriate.
The awards under the 2014 Plan other than Incentive Stock Options (“ISOs”) may be granted to employees, directors and consultants. ISOs may be
granted only to Employees of the Company, a parent or a subsidiary. An employee, director or consultant who has been granted an award may, if otherwise
eligible, be granted additional awards. Awards may be granted to such employees, directors or consultants who are residing in foreign jurisdictions as the
administrator may determine from time to time. Options granted under the 2014 Plan will be subject to the terms and conditions established by the
administrator. Under the terms of the 2014 Plan, the exercise price of the options will not be less than the fair market value (as determined under the 2013
Plan) of our common stock at the time of grant. Options granted under the 2014 Plan will be subject to such terms, including the exercise price and the
conditions and timing of exercise, as may be determined by the administrator and specified in the applicable award agreement. The maximum term of an option
granted under the 2014 Plan will be ten years from the date of grant. Payment in respect of the exercise of an option may be made in cash, by certified or
official bank check, by money order or with shares, pursuant to a “cashless” or “net issue” exercise, by a combination thereof, or by such other method as the
administrator may determine to be appropriate and has been included in the terms of the option.
The 2014 Plan may be amended, suspended or terminated by the Board, or an administrator appointed by the Board, at any time and for any reason.
All Equity Compensation Plans
The following table presents securities authorized for issuance under the Company’s equity compensation plans, as of December 31, 2017:
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
Stock Performance Graph
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights (#)
Weighted-average
exercise price of
outstanding options,
warrants and rights ($)
1,936,294
-
1,936,294
$
$
11.28
-
11.28
Number of securities
remaining available for
future issuance under
equity compensation
plans
1,039,356
-
1,039,356
The line graph that follows compares the cumulative total stockholder return on our shares of common stock with the cumulative total return of the
Nasdaq Healthcare Index (^IXHC)* and the Russell 3000 Index (RUA)* Index for the five years ended December 31 2017. The graph and table assume that $100
was invested on the last day of trading for the fiscal year 2012 in each of our shares of common stock, the Nasdaq Healthcare Index, and the Russell 3000
Index, and that no dividends were paid. Cumulative total stockholder returns for our shares of common stock, Nasdaq Healthcare Index, and the Russell 3000
Index are based on our fiscal year, which is the same as the calendar year.
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Transfer Agent
The Company’s transfer agent and Registrar for the common stock is Corporate Stock Transfer, Inc. located in Denver, Colorado.
Recent Sales of Unregistered Securities
All unregistered sales and issuances of equity securities for the year ended December 31, 2017 were previously disclosed in a Form 8-K or Form 10-Q
filed with the SEC.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain of our selected consolidated financial data as of the dates and for the years indicated. Historical results are not
necessarily indicative of the results to be expected for any future period.
The following selected consolidated financial information was derived from our fiscal year end consolidated financial statements. The following
information should be read in conjunction with those statements and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”. Our summary consolidated statement of operations and comprehensive loss data for the fiscal years ended December 31, 2015, 2016 and 2017
and our summary consolidated balance sheet data as of December 31, 2016 and 2017, as set forth below, are derived from, and are qualified in their entirety by
reference to, our audited consolidated financial statements, including the notes thereto, which are included in this Annual Report. The summary balance sheet
data as of December 31, 2015, 2014 and 2013, and summary consolidated statement of operations and comprehensive loss data for the fiscal years ended
December 31, 2014 and 2013, set forth below are derived from our audited consolidated financial statements which are not included herein.
Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or
U.S. GAAP.
Based on the fact that, we were operating in two separate reportable segments: (i) Biomedicine and (ii) Consulting, from February 6, 2013 to June 23,
2014 (when we decided to discontinue our Consulting segment), the summary consolidated statement of operations and comprehensive loss data for the fiscal
years ended December 31, 2014 and 2013 included the results of Consulting segment, which were presented therein as “Loss on discontinued operations, net of
taxes”. The Company’s results from continuing operations in the summary consolidated statement of operations and comprehensive loss data were reflecting
the operating results of Biomedicine segment. As a result of prioritizing cancer therapeutic technologies and focusing our clinical efforts on developing CART
technologies, Vaccine, Tcm and TCR clonality technologies, we ceased the cooperation with the Jihua Hospital and several agents in the second quarter of
2016, all of our revenues was derived from cell therapy technology service since then.
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CELLULAR BIOMEDICINE GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Summary Consolidated statement of operations and comprehensive loss data:
For the Year Ended
December 31,
2017
2016
2015
2014
2013
Net sales and revenue
Operating expenses:
Cost of sales
General and administrative
Selling and marketing
Research and development
Impairment of investments
Total operating expenses
Operating loss
Other income:
Interest income
Other income
Total other income
Loss from continuing operations before taxes
Income taxes credit (provision)
Loss from continuing operations
Loss on discontinued operations, net of taxes
Net loss
Other comprehensive income (loss):
Cumulative translation adjustment
Unrealized gain (loss) on investments, net of tax
Reclassification adjustments, net of tax, in connection with other-than-
temporary impairment of investments
Total other comprehensive income (loss):
Comprehensive loss
Net loss per share :
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Summary Consolidated balance sheet
data:
Cash and cash equivalents
Current working capital (1)
Total assets
Other non-current liabilities
Stockholders’ equity
$
336,817 $
627,930 $ 2,505,423 $
564,377 $
204,914
162,218
360,766
860,417 1,880,331
296,212
12,780,483 11,670,506 13,068,255 7,875,413 9,162,172
58,275
14,609,917 11,475,587 7,573,228 3,146,499 2,041,872
-
27,913,384 29,043,264 23,354,393 13,006,861 11,558,531
(27,576,567) (28,415,334) (20,848,970) (12,442,484) (11,353,617)
123,428 1,427,840
- 4,611,714
242,215
314,894
709,151
425,040
42,220
630,428
672,648
78,943
132,108
211,051
1,294
133,621
(6,196)
1,955,086
2,088,707
(4,902)
(25,487,860) (28,204,283) (20,176,322) (12,355,459) (11,358,519)
-
(25,490,310) (28,208,376) (19,447,721) (12,355,459) (11,358,519)
- (3,119,152) (2,438,514)
$(25,490,310) $(28,208,376) $(19,447,721) $(15,474,611) $(13,797,033)
15,043
71,982
87,025
728,601
(2,450)
(4,093)
-
-
-
967,189
15,254
(240,000) 5,300,633 (1,376,540) 1,611,045
(743,271)
(307,950)
78,650
(198,200)
- (5,557,939)
-
727,189 (1,000,577) (1,684,490) 1,626,299
-
(119,550)
$(24,763,121) $(29,208,953) $(21,132,211) $(13,848,312) $(13,916,583)
-
$
$
(1.78) $
(1.78) $
(2.09) $
(2.09) $
(1.70) $
(1.70) $
(1.79) $
(1.79) $
(2.38)
(2.38)
14,345,604 13,507,408 11,472,306 8,627,094 5,792,888
14,345,604 13,507,408 11,472,306 8,627,094 5,792,888
2017
2016
2015
2014
2013
As of December 31,
$21,568,422 $39,252,432 $14,884,597 $14,770,584 $ 7,175,215
20,850,823 38,328,048 13,675,034 12,019,143 5,373,355
61,162,296 68,628,467 49,460,422 43,685,102 17,596,726
-
57,302,526 65,893,954 46,364,936 39,156,091 15,395,073
452,689
183,649
370,477
76,229
(1) Current working capital is the difference between total current assets and total current liabilities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is management's discussion and analysis of certain significant factors that have affected our financial position and operating results during
the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar
expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks
and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to
time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other
financial information included in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting
period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience
and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following summarizes critical estimates made by management in the preparation of the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2017
and 2016, respectively, cash and cash equivalents include cash on hand and cash in the bank. At times, cash deposits may exceed government-insured limits.
Accounts Receivable
Accounts receivable represent amounts earned but not collected in connection with the Company’s sales as of December 31, 2017 and 2016. Accounts
receivable are carried at their estimated collectible amounts.
The Company follows the allowance method of recognizing uncollectible accounts receivable. The Company recognizes bad debt expense based on
specifically identified customers and invoices that are anticipated to be uncollectable. At December 31, 2017 and 2016, allowance of $10,789 and $10,163 was
provided for debtors of certain customers as those debts are unrecoverable from customers, respectively.
Inventory
Inventories consist of raw materials, work-in-process, semi-finished goods and finished goods. Inventories are initially recognized at cost and
subsequently at the lower of cost and net realizable value under first-in first-out method. Finished goods are comprised of direct materials, direct labor,
depreciation and manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete
and dispose. The Company regularly inspects the shelf life of prepared finished goods and, if necessary, writes down their carrying value based on their
salability and expiration dates into cost of goods sold.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets
ranging from three to ten years and begins when the related assets are placed in service. Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Plant, property and
equipment are reviewed each year to determine whether any events or circumstances indicate that the carrying amount of the assets may not be recoverable.
We assess the recoverability of the asset by comparing the projected undiscounted net cash flows associated with the related assets over the estimated
remaining life against the respective carrying value.
Goodwill and Other Intangibles
Goodwill represents the excess of the cost of assets acquired over the fair value of the net assets at the date of acquisition. Intangible assets represent
the fair value of separately recognizable intangible assets acquired in connection with the Company’s business combinations. The Company evaluates its
goodwill and other intangibles for impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred. As of
December 31, 2017, the goodwill is $7,678,789, which all derived from the acquisition of Agreen.
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As stipulated in ASC 350-20-35-3A, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including goodwill, in which relevant triggering events and circumstances should be assessed. During the year
ended December 31, 2017, it considered no triggering event indicating that the goodwill impairment test was required at the balance sheet date. In addition, the
Company’s market capitalization as at the balance sheet date would fairly reflect the fair value of the Company’s research and development efforts so as to
provide an indication of whether the goodwill is subject to the impairment loss. Our market capitalization exceeds the carrying amount of net assets (including
goodwill) of the Company. No impairment loss of goodwill is considered required as of December 31, 2017.
Other intangibles mainly consists of knowhow, technologies, patent, licenses acquired and purchased software. The Company reviews the carrying
value of long-lived assets to be held and used, including other intangible assets subject to amortization, when events and circumstances warrants such a review.
The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is
less than its carrying value. No impairment is considered to be required as of December 31, 2017.
The Company is an expanding company with a short operating history, accordingly, the Company faces some potential events and uncertainties
encountered by companies in the earlier stages of development and expansion, such as: (1) continuing market acceptance for our product extensions and our
services; (2) changing competitive conditions, technological advances or customer preferences that could harm sales of our products or services; (3) maintaining
effective control of our costs and expenses. If the Company is not able to meet the challenge of building our businesses and managing our growth, the likely
result would be slowed growth, lower margins, additional operational costs and lower income, and a risk of impairment charge of intangibles in future filings.
Treasury Stock
The treasury stock is recorded and carried at their repurchase cost. The Company recorded the entire purchase price of the treasury stock as a
reduction of equity. A gain and or loss will be determined when treasury stock is reissued or retired, and the original issue price and book value of the stock do
not enter into the accounting. Additional paid-in capital from treasury stock is credited for gains and debited for losses when treasury stock is reissued at prices
that differ from the repurchase cost.
Government Grants
Government grants are recognized in the balance sheet initially when there is reasonable assurance that they will be received and that the enterprise
will comply with the conditions attached to them. When the Company received the government grants but the conditions attached to the grants have not been
fulfilled, such government grants are deferred and recorded as dferred income. The reclassification of short-term or long-term liabilities is depended on the
management’s expectation of when the conditions attached to the grant can be fulfilled. Grants that compensate the Company for expenses incurred are
recognized as other income in statement of income on a systematic basis in the same periods in which the expenses are incurred.
For the year ended December 31, 2017 and 2016, the Company received government grants of $1,905,213 and $422,839 for purpose of R&D and
related capital expenditure, respectively. Government subsidies recognized as other income in the statement of income for the year ended December 31, 2017
and 2016 were $2,077,486 and $78,542, respectively.
Fair Value of Financial Instruments
Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company uses various methods
including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable inputs. The Company uses valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Company is required to provide the following
information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
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Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for
identical or similar assets or liabilities.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow
models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable
assumptions and projections in determining the fair value assigned to such assets.
All transfers between fair value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The inputs
or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investment in those instruments.
The carrying amounts of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, income tax payable
and related party payable approximate fair value due to their short maturities.
Investments
The fair value of “investments” is dependent on the type of investment, whether it is marketable or non-marketable.
Marketable securities held by the Company are held for an indefinite period of time and thus are classified as available-for-sale securities. The fair value
is based on quoted market prices for the investment as of the balance sheet date. Realized investment gains and losses are included in the statement of
operations, as are provisions for other than temporary declines in the market value of available for-sale securities. Unrealized gains and unrealized losses
deemed to be temporary are excluded from earnings (losses), net of applicable taxes, as a component of other comprehensive income (loss). Factors
considered in judging whether an impairment is other than temporary include the financial condition, business prospects and creditworthiness of the issuer, the
length of time that fair value has been less than cost, the relative amount of decline, and the Company’s ability and intent to hold the investment until the fair
value recovers.
Stock-Based Compensation
We periodically use stock-based awards, consisting of shares of common stock or stock options, to compensate officers, employees, directors and
consultants. Awards are expensed on a straight line basis over the requisite service period based on the grant date fair value, net of estimated forfeitures, if any.
Revenue Recognition
The Company utilizes the guidance set forth in the FASB’s ASC Topic 605, “Revenue Recognition”, regarding the recognition, presentation and
disclosure of revenue in its financial statements. The Company recognizes revenue when pervasive evidence of an arrangement exists, the price is fixed and
determinable, collection is reasonably assured and delivery of products or services has been rendered.
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Income Taxes
Income taxes are accounted for using the asset and liability method as prescribed by ASC 740 “Income Taxes”. Under this method, deferred income tax
assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax
assets for which if it is more likely than not that the related benefit will not be realized.
While we have optimistic plans for our business strategy, we determined that a full valuation allowance was necessary against all net deferred tax assets
as of December 31, 2017 and 2016, given the current and expected near term losses and the uncertainty with respect to our ability to generate sufficient profits
from our business model.
Recent Accounting Pronouncements
Accounting pronouncements adopted during the year ended December 31, 2017
In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting
for employee share-based payment transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after
December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The adoption of the ASU 2016-09 did not have a material
impact on the Company’s consolidated financial statements.
Accounting pronouncements not yet effective
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which provides financial statement preparers with an option to reclassify
stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim
period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be
applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax
rate in the Tax Cuts and Jobs Act is recognized. We do not expect the adoption of ASU 2018-02 to have a material impact on our consolidated financial
statements.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and
Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope
Exception” (“ASU 2017-11”), which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments)
with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this ASU are effective
for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently
evaluating the impact of the adoption of ASU 2017-11 on its consolidated financial statements.
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In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-
09”), which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification
accounting under Topic 718. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for
which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made
available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. We do not expect the
adoption of ASU 2017-09 to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-
20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”), which clarifies the scope of
the nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that the derecognition of all businesses and nonprofit activities (except those related
to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation
guidance in Subtopic 810-10. The amendments in this ASU also provide guidance on the accounting for what often are referred to as partial sales of nonfinancial
assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other non-controlled investee. The amendments in this
ASU are effective for annual reporting reports beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities
may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that
reporting period. We do not expect the adoption of ASU 2017-05 to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU
2017-04”), which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill
impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The
new guidance does not amend the optional qualitative assessment of goodwill impairment. Public business entity that is a U.S. Securities and Exchange
Commission filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating
the impact of the adoption of ASU 2017-04 on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do
not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not
expect the adoption of ASU 2016-18 to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-
coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing;
contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in
securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
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In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for assets held at amortized cost
basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current
GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is
deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit
losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a
write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The
amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any
other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842,
Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash
flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified
as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing
between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases
in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in
Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The
amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public
business entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on
our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to be measured at fair value with changes in the
fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).
The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair
value option for financial instruments. In addition, the amendments in this update eliminate the requirement for to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public
entities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted.
We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
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In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the
revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The
FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”) in August 2015. The
amendments in ASU 2015-14 defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans
should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within
that reporting period. Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”) in March 2016, ASU No. 2016-10, “Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) in April 2016, ASU No. 2016-12, “Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), and ASU No. 2016-20, “Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), respectively. The amendments in ASU 2016-08 clarify the
implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or
service before it is transferred to the customers. ASU 2016-10 clarifies guidelines related to identifying performance obligations and licensing implementation
guidance contained in the new revenue recognition standard. The updates in ASU 2016-10 include targeted improvements based on input the FASB received
from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in practice
potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis.
ASU 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition.
Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the
presentation of sales taxes and other similar taxes collected from customers. The amendments in ASU 2016-20 represents changes to make minor corrections
or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative
cost to most entities. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as ASU 2014-
09. The Company will adopt ASC Topic 606, Revenue from Contracts with Customers , using the modified retrospective transition approach. Under this
approach, ASC Topic 606 would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of
January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized
using a cumulative effect adjustment to the opening balance of accumulated deficit. The Company does not anticipate the adoption of these ASUs to have
material changes to its revenue recognition practices nor material impact on its consolidated financial statements.
Comparison of Year Ended December 31, 2017 to Years Ended December 31, 2016 and 2015
Although the descriptions in the results of operations below reflect our operating results as set forth in our Consolidated Statement of Operations filed
herewith, we are presenting consolidated pro forma information below to reflect the impacts of the business combination as if the transaction had occurred at the
beginning of the earliest period presented.
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Net sales and revenue
Operating expenses:
Cost of sales *
General and administrative *
Selling and marketing *
Research and development *
Impairment of investments
Total operating expenses
Operating loss
Other income
Interest income
Other income
Total other income
Loss before taxes
Income taxes credit (provision)
Net loss
Other comprehensive income (loss):
Cumulative translation adjustment
Unrealized gain (loss) on investments, net of tax
Reclassification adjustments, net of tax, in connection with other-than-temporary impairment of
investments
Total other comprehensive income (loss):
Comprehensive loss
Net loss per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
For the Year Ended December 31,
2017
2016
$
336,817
$
627,930
$
2015
2,505,423
162,218
12,780,483
360,766
14,609,917
-
27,913,384
(27,576,567)
860,417
11,670,506
425,040
11,475,587
4,611,714
29,043,264
(28,415,334)
1,880,331
13,068,255
709,151
7,573,228
123,428
23,354,393
(20,848,970)
133,621
1,955,086
2,088,707
(25,487,860)
78,943
132,108
211,051
(28,204,283)
42,220
630,428
672,648
(20,176,322)
(2,450)
$ (25,490,310)
(4,093)
$ (28,208,376)
728,601
$ (19,447,721)
967,189
(240,000)
-
727,189
(743,271)
5,300,633
(307,950)
(1,376,540)
(5,557,939)
(1,000,577)
-
(1,684,490)
$ (24,763,121)
$ (29,208,953)
$ (21,132,211)
$
$
(1.78)
$
(1.78)
$
(2.09)
$
(2.09)
$
(1.70)
(1.70)
14,345,604
14,345,604
13,507,408
13,507,408
11,472,306
11,472,306
* These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated:
Cost of sales
General and administrative
Selling and marketing
Research and development
For the Year Ended December 31,
2016
2015
2017
51,288
2,935,798
52,984
2,305,141
5,345,211
18,916
3,110,237
56,704
2,266,560
5,452,417
144,200
4,948,375
188,579
2,311,283
7,592,437
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Segments
The Company is engaged in the development of new treatments for cancerous and degenerative diseases utilizing proprietary cell-based technologies,
which have been organized as one reporting segment since they have similar nature and economic characteristics. The Company’s principle operating decision
maker, the Chief Executive Officer, receives and reviews the result of the operation for all major cell platforms as a whole when making decisions about
allocating resources and assessing performance of the Company. In accordance with FASB ASC 280-10, the Company is not required to report the segment
information.
Results of Operations:
Revenues
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$
336,817 $
627,930 $ 2,505,423 $
(291,113)
(46)% $ (1,877,493)
(75)%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
Majority of the revenue was derived from cell therapy technology service for the year ended December 31, 2017. The decrease in revenue is the result
of prioritizing cancer therapeutic technologies, and focusing our clinical efforts on developing CAR-T technologies, Vaccine, Tcm and TCR clonality technologies.
Such decrease in revenue was also attributable to the fact that the Company ceased its cooperation with the Jihua Hospital and several agents in the second
quarter of 2016 and were not actively pursuing the fragmented technical services opportunities.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
All the revenue was derived from cell therapy technology service for year ended December 31, 2016. The decrease in revenue is the result of prioritizing
cancer therapeutic technologies and focusing our clinical efforts on developing CART technologies, Vaccine, Tcm and TCR clonality technologies. As a result of
not focusing on the cell therapy technology service revenue, in the second quarter of 2016 the Company ceased its cooperation with the Jihua Hospital and
several agents.
Cost of Sales
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$
162,218 $
860,417 $ 1,880,331 $
(698,199)
(81)% $ (1,019,914)
(54)%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
The cost of sales decreased in line with the sales. The cost of sales in 2016 was mainly due to the high fixed cost of Beijing site. Since there was no
revenue from the Beijing site in 2017, the cost of sales decreased significantly.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
The cost of sales decreased in line with the sales. As fixed costs, such as rental and staff costs etc., accounts for a majority of the cost of sales, the cost
of sales didn’t decrease as much as sales.
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General and Administrative Expenses
Year ended December 31,
$12,780,483 $11,670,506 $13,068,255 $ 1,109,977
10% $ (1,397,749)
(11)%
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
Increased expenses in 2017 was primarily attributed to below facts:
● An increase in rental expenses of $2,224,000, which mainly resulted from the new leased plant located in the “Pharma Valley” of Shanghai from
January 1, 2017;
● A decrease in legal, audit and other professional fees of $478,000, which mainly attributed to the Company’s registration statements on Forms S-3
and S-8 filed in first half of 2016 that led to large professional fees in 2016;
● A decrease in salary of $465,000; and
● A decrease in insurance fee of $171,000, which mainly resulted from the decrease in premium for director and officer liability and Company
reimbursement insurance.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
Decreased expenses in 2016 were primarily attributed to below facts:
● A decrease in stock-based compensation expense of $1,838,000, which primarily resulted from: i) forfeiture of the options in connection with the
resignation of Wei Cao as the CEO of the Company in February 2016 and as director in May 2016. For further details please refer to Item 15 Note
16-Commitments and Contingencies - Service Agreement with Wei (William) Cao in this annual report; ii) the issuance of a large amount of options
in the first quarter of 2013, most of which vested over 3 years. With the end of vesting periods, the stock-based compensation expense decreased
significantly in 2016; and
● Offset by an increase in legal, audit and other professional fees of $383,000, which mainly related to the Company’s filing of Registration Statements
on Forms S-3 and S-8 in 2016.
Sales and Marketing Expenses
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$
360,766 $
425,040 $
709,151 $
(64,274)
(15)% $
(284,111)
(40)%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
The selling and marketing expenses decrease was mainly attributed to the decline in travelling expenses of $21,000, salary of $16,000, entertainment
expenses of $15,000 and marketing expenses of $14,000 in 2017.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
Decreased expenses in 2016 were primarily attributed to below facts:
● A decrease in stock-based compensation of $132,000. This mainly resulted from the fact that one sales vice president resigned in April 2016 and
part of her options were forfeited; and
● A decrease in travelling expenses of $51,000, a decrease in market analysis and other professional fees of $68,000 and a decrease in staff cost of
$35,000 due to the Company ceased cooperation with hospitals and agents in the second quarter of 2016.
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Research and Development Expenses
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$14,609,917 $11,475,587 $ 7,573,228 $ 3,134,330
27% $ 3,902,359
52%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
Research and development costs increased by approximately $3,134,000 as compared to the year ended December 31, 2016. The increase was
primarily attributed to the facts below:
● An increase in payroll expenses of $626,000 as a result of headcount increase and payroll raise. Total headcount for our R&D team increased from
81 as of December 31, 2016 to 98 as of December 31, 2017;
● An increase in raw material consumption of $447,000;
● An increase in rental expenses of $1,514,000, which was mainly attributed to the launching of R&D activities at our Beijing facility in the 2nd quarter
of 2016 and the lease of a GMP facility in the United States to commence the KOA preclinical and clinical studies in 2017; and
● An increase in depreciation and amortization of $455,000, which was mainly attributed to the purchase of our new equipment for immunotherapy
research and development.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
Research and development costs increased by approximately $3,902,000 as compared to the year ended December 31, 2015. The increase was
primarily attributed to the facts below:
● An increase in payroll expenses of $1,581,000 in line with the increase of our immunotherapy research and development team. Total headcount of
our R&D team increased from 47 as of December 31, 2015 to 81 as of December 31, 2016;
● An increase in depreciation and amortization of $568,000, which was mainly attributed to the technology obtained from 301 Hospital in June 2015
and newly purchased equipment for immunotherapy research and development;
● An increase in clinical studies expenditure of $675,000;
● An increase in raw material consumption of $697,000;
● An increase in rental expense of $210,000; and
● An increase in travelling expense of $59,000.
Impairment of Investments
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$
- $ 4,611,714 $
123,428 $ (4,611,714)
(100)% $ 4,488,286
3636%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
No impairment of investment was made in 2017. The impairment of investments in 2016 is attributed to the recognition of other than temporary
impairment on the value of shares in investments.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
The impairment of investments in 2016 and 2015 is attributed to the recognition of other than temporary impairment on the value of shares in
investments. The impairment on investments was primarily attributed to the valuation loss for the stock investment in Arem Pacific Corporation, which share
price recently significantly dropped. The stock of ARPC held by us are illiquid restricted shares that are very thinly traded on the OTC Markets, we consider that
it indicates the likelihood that the impairment is other-than-temporary.
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Operating Loss
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$(27,576,567) $(28,415,334) $(20,848,970) $
838,767
(3)% $ (7,566,364)
36%
The decrease in the operating loss for 2017 as compared to 2016 and the increase compared to 2015 was primarily due to changes in revenues, cost of
sales, general and administrative expenses, research and development expenses and impairment of investments, each of which was described above.
Other Income
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$ 2,088,707 $
211,051 $
672,648 $ 1,877,656
890% $
(461,597)
(69)%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
Other income, net for the year ended December 31, 2017 was primarily government subsidy of $2,077,000, interest income of $134,000, and netting of
the net foreign exchange loss of $112,000.
Other income, net for the year ended December 31, 2016 was primarily interest income of $79,000, third party R&D subsidy of $40,000, net foreign
exchange gain of $90,000 and government subsidy of $78,000, netting of the charity donation of $78,000.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
Other income, net for the year ended December 31, 2016 was primarily interest income of $79,000, third party R&D subsidy of $40,000, net foreign
exchange gain of $90,000 and government subsidy of $78,000, netting of the charity donation of $78,000.
Other income, net for the year ended December 31, 2015 was primarily a decrease in fair value of accrued expenses for the acquisition of intangible
assets of $346,000, government subsidy income of $233,000 and interest income of $42,000. On June 26, 2015, the Company completed its acquisition of the
certain license rights to technology and know-how from Blackbird and entered into an assignment and assumption agreement to acquire all of Blackbird’s right,
title and interest in and to the exclusive worldwide license to a CD40LGVAX vaccine from the University of South Florida. According to the Asset Purchase
Agreement, by and among the Company, Blackbird and its principals, 28,120 shares of Company common stock were issued as part of the consideration of this
transaction. In addition, 18,747 shares of Company common stock (equal to $700,000 based on the 20-day volume-weighted average price of the Company’s
stock on the closing date) will be delivered to Blackbird on the 6 month anniversary of the closing date upon satisfaction of certain conditions. Those shares
were finally issued in November 2015 with unanimous consent of the Board. Above shares were revalued according to the fair market value as of issuance date
and resulted in the other income of $346,000.
Income Tax (Expenses) Credit
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$
(2,450) $
(4,093) $
728,601 $
1,643
(40)% $
(732,694)
(101)%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
While we have optimistic plans for our business strategy, we determined that a valuation allowance was necessary given the current and expected near
term losses and the uncertainty with respect to our ability to generate sufficient profits from our business model. Therefore, we established a valuation allowance
for deferred tax assets other than the extent of the benefit from other comprehensive income. Income tax expenses for the year ended December 31, 2017 and
2016 all represent US state tax.
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Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
While we have optimistic plans for our business strategy, we determined that a valuation allowance was necessary given the current and expected near
term losses and the uncertainty with respect to our ability to generate sufficient profits from our business model. Therefore, we established a valuation allowance
for deferred tax assets other than the extent of the benefit from other comprehensive income.
Income tax expenses for the year ended December 31, 2016 all represent US state tax.
Income tax expense in 2015 mainly included the current income tax credit of $733,000 as tax losses incurred in U.S. group companies for year ended
December 31, 2015.
Net Loss
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$(25,490,310) $(28,208,376) $(19,447,721) $ 2,718,066
(10)% $ (8,760,655)
45%
Changes in net loss are primarily attributable to changes in operations of our biomedicine segment which are described above.
Comprehensive Loss
2017
2016
2015
Change
Percent
Change
Percent
2017 versus 2016
2016 versus 2015
Year ended December 31,
$(24,763,121) $(29,208,953) $(21,132,211) $ 4,445,832
(15)% $ (8,076,742)
38%
Fiscal Year Ended December 31, 2017, Compared to Fiscal Year Ended December 31, 2016
Comprehensive net loss for 2017 includes unrealized loss on investments of approximately $240,000 and a currency translation net gain of
approximately $967,000 combined with the changes in net loss. The unrealized loss on investments was attributed to the valuation change for the stock
investment in ARPC.
Fiscal Year Ended December 31, 2016, Compared to Fiscal Year Ended December 31, 2015
Comprehensive net loss for 2016 includes unrealized net gain on investments of approximately $5,301,000, reclassification adjustments, net of tax, of
approximately $5,558,000, in connection with other-than-temporary impairment of investments and a currency translation net loss of approximately $743,000
combined with the changes in net loss. The unrealized gain and reclassification adjustments on investments were primarily attributed to the valuation change for
the stock investment in ARPC.
Comprehensive loss for the year ended December 31, 2015 included an unrecognized loss on investments of approximately $1,377,000, and a currency
translation net loss of approximately $308,000 combined with the changes in net income. The unrecognized loss on investments was primarily attributed to the
valuation loss for the stock investment in Arem Pacific Corporation.
Share-Based Compensation
Share-based compensation totaled $5.3 million in 2017 ($5.5 million in 2016 and $7.6 million in 2015). Share-based compensation was included in cost
of sales and operating expenses.
As of December 31, 2017, unrecognized share-based compensation costs and the weighted average periods over which the costs are expected to be
recognized were as follows:
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Non-vested stock options
Non-vested restricted stock
Unrealised Share-
Based
Compensation
Costs
4,362,541
385,331
$
$
Shares
592,249
34,105
Weighted Average
Period
2.29 year
1.37 year
Non-vested restricted stock above doesn’t include restricted stock awards (RSU) to be issued under long-term incentive plan. The Company is
authorized to deduct the amount of tax withholding from the amount payable to the grantee upon settlement of the RSUs. The Company will withhold from the
total number of shares of Common Stock the grantee is to receive a number of shares the value of which is sufficient to satisfy any such withholding obligation at
the minimum applicable withholding rate.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $20,850,823 as of December 31, 2017 compared to $38,328,048 as of December 31, 2016. Our cash position decreased to
$21,568,422 at December 31, 2017 compared to $39,252,432 at December 31, 2016, as we had an increase in cash used in operating and investing activities,
partially offset by cash inflow generated from financing activities due to a private placement financing in 2017 for aggregate net proceeds of approximately
$14,496,000,
Net cash provided by or used in operating, investing and financing activities from continuing operations were as follows (in thousands):
Net cash used in operating activities was approximately $18,593,000, $15,868,000 and $11,751,000 for the years ended December 31, 2017, 2016 and
2015, respectively. The following table reconciles net loss to net cash used in operating activities:
For year ended December 31,
Net loss
Income statement reconciliation items
Changes in operating assets, net
Net cash used in operating activities
2017 versus
2016
Change
2016 versus
2015
Change
2017
2016
2015
$(25,490,310) $(28,208,376) $(19,447,721) $ 2,718,066 $ (8,760,655)
8,331,491 12,596,060 9,595,098 (4,264,569) 3,000,962
(1,434,573)
(255,419) (1,898,475) (1,179,154) 1,643,056
$(18,593,392) $(15,867,735) $(11,751,098) $ (2,725,657) $ (4,116,637)
The 2017 change in operating assets and liabilities was primarily due to an increase in accounts receivable, other receivables and long-term prepaid
expenses as well as the decrease in accrued expenses and non-current liabilities, netting of by the increase in other current liabilities. The 2016 change in
operating assets and liabilities was primarily due to an increase in prepaid expenses and long-term prepaid expenses, net of the decrease in accounts
receivable and inventory.
Net cash used in investing activities was approximately $10,193,000, $2,733,000 and $7,702,000 for the years ended December 31, 2017, 2016 and
2015, respectively. These amounts were the result of acquisition of business, purchases of fixed assets and intangible assets.
Cash provided by financing activities was approximately $10,826,000, $43,286,000 and $19,647,000 for the years ended December 31, 2017, 2016 and
2015, respectively. These amounts were mainly attributable to the proceeds received from the issuance of common stock and exercise of stock options, netting
of by the cash used in repurchase of treasury stock.
Liquidity and Capital Requirements Outlook
Excluding any potential TCR clinical development or sponsorship of a CD40LGVAX Trial in the U.S. and other regions outside of China CD40LGVAX
Trial, we anticipate that the Company will require approximately $45 million in cash to operate as planned in the coming 12 months. Of this amount,
approximately $36 million will be used to operate our facilities and offices, including but not limited to payroll expenses, rent and other operating costs, and to
fund our research and development as we continue to develop our products through the clinical study process. Approximately $9 million will be used as capital
expenditure in machinery, equipment and facilities to expand our immune cell therapy business and CAR-T research and development, although we may revise
these plans depending on the changing circumstances of our biopharmaceutical business.
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We expect to rely on current cash balances that we hold to provide for these capital requirements. We do not intend to use, and will not rely on our
holdings in securities to fund our operations. One of our stocks held, Arem Pacific Corporation, has a declared effective S-1 prospectus which relates to the
resale of up to 13,694,711 shares of common stock, inclusive of the 8,000,000 shares held by the Company. However, the shares offered by this filing may only
be sold by the selling stockholders at $0.05 per share until the shares are quoted on the OTCQB® tier of OTC Markets or an exchange. Another one of our
stocks held, Wonder International Education & Investment Group Corporation (“Wonder”), is no longer traded on any stock market. We do not know whether we
can liquidate our 8,000,000 shares of Arem Pacific stock or the 2,057,131 shares of Wonder stock or any of our other portfolio securities, or if liquidated, whether
the realized amount will be meaningful at all. As a result, we have written down above stocks to their fair value.
On April 15, 2016, the Company completed the second and final closing of a financing transaction with Wuhan Dangdai Science & Technology
Industries Group Inc., pursuant to which the Company sold to the Investor 2,006,842 shares of the Company’s common stock, par value $0.001 per share, for
approximately $38,130,000 in gross proceeds. As previously disclosed in a Current Report on Form 8-K filed on February 10, 2016, the Company conducted the
initial closing of the financing on February 4, 2016. The aggregate gross proceeds from both closings in the financing totaled approximately $43,130,000. In the
aggregate, 2,270,000 shares of Common Stock were issued in the financing. On March 22, 2016, the Company filed a registration statement on Form S-3 to
offer and sell from time to time, in one or more series, any of the securities of the Company, for total gross proceeds up to $150,000,000. On June 17, 2016, the
SEC declared the S-3 effective; we have yet to utilize any of the $150,000,000 registered under the S-3. On December 26, 2017, the Company entered into a
Share Purchase Agreement with two investors, pursuant to which the Company agreed to sell and the two investors agreed to purchase from the Company, an
aggregate of 1,166,667 shares of the Company’s common stock, par value $0.001 per share, at $12.00 per share, for total gross proceeds of approximately
$14,000,000. The transaction closed on December 28, 2017. Together with a private placement with three of its executive officers on December 22, 2017, the
Company raised an aggregate of approximately $14.5 million in the two private placements in December 2017. On January 30, 2018 and February 5, 2018, the
Company entered into Securities Purchase Agreements with certain investors, pursuant to which the Company agreed to sell, and the Investors agreed to
purchase from the Company, an aggregate of 1,719,324 shares of the Company’s common stock, par value $0.001 per share, at $17.80 per share, for total
gross proceeds of approximately $30.6 million. The February 2018 Private Placement closed on February 5, 2018. As we continue to incur losses, achieving
profitability is dependent upon the successful development of our cell therapy business and commercialization of our technology in research and development
phase, which is a number of years in the future. Once that occurs, we will have to achieve a level of revenues adequate to support our cost structure. We may
never achieve profitability, and unless and until we do, we will continue to need to raise additional capital. Management intends to fund future operations through
additional private or public debt or equity offerings, and may seek additional capital through arrangements with strategic partners or from other sources.
Our medium to long term capital needs involve the further development of our biopharmaceutical business, and may include, at management’s
discretion, new clinical trials for other indications, strategic partnerships, joint ventures, acquisition of licensing rights from new or current partners and/or
expansion of our research and development programs. Furthermore, as our therapies pass through the clinical trial process and if they gain regulatory approval,
we expect to expend significant resources on sales and marketing of our future products, services and therapies.
In order to finance our medium to long-term plans, we intend to rely upon external financing. This financing may be in the form of equity and or debt, in
private placements and/or public offerings, or arrangements with private lenders. Due to our short operating history and our early stage of development,
particularly in our biopharmaceutical business, we may find it challenging to raise capital on terms that are acceptable to us, or at all. Furthermore, our
negotiating position in the capital raising process may worsen as we consume our existing resources. Investor interest in a company such as ours is dependent
on a wide array of factors, including the state of regulation of our industry in China (e.g. the policies of MOH and the CFDA), the U.S. and other countries,
political headwinds affecting our industry, the investment climate for issuers involved in businesses located or conducted within China, the risks associated with
our corporate structure, risks relating to our partners, licensed intellectual property, as well as the condition of the global economy and financial markets in
general. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and
covenants that restrict our ability to operate as a business; our stock price may not reach levels necessary to induce option or warrant exercises; and asset sales
may not be possible on terms we consider acceptable. If we are unable to raise the capital necessary to meet our medium- and long-term liquidity needs, we
may have to delay or discontinue certain clinical trials, the licensing, acquisition and/or development of cell therapy technologies, and/or the expansion of our
biopharmaceutical business; or we may have to raise funds on terms that we consider unfavorable.
Off-Balance Sheet Transactions
We do not have any off-balance sheet arrangements except the lease and capital commitment described in “Contractual Obligations” below.
Contractual Obligations
We have various contractual obligations that will affect our liquidity. The following table sets forth our contractual obligations as of December 31, 2017.
Payments due by period
Total
Less than
1 year
2-3
years
4-5
years
More than
5 years
$ 1,444,449 $ 1,428,035 $
-
23,684,480 3,062,842 5,449,762 5,095,980 10,075,896
16,414 $
- $
$25,128,929 $ 4,490,877 $ 5,466,176 $ 5,095,980 $10,075,896
75
Contractual Obligations
Capital Commitment
Operating Lease Obligations
Total
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Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Company’s business. The Company’s exposure to these
risks and the financial risk management policies and practices used by the Company to manage these risks are described below.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The
Company’s credit risk is primarily attributable to cash at bank and receivables etc. Exposure to these credit risks are monitored by management on an ongoing
basis.
The cash at bank of the Group is mainly held with well-known or state owned financial institutions, such as HSBC, Bank of China and China Merchant
Bank etc. Management does not foresee any significant credit risks from these deposits and does not expect that these financial institutions may default and
cause losses to the Company.
In respect of receivables, the Company does not obtain collateral from customers. The Company’s exposure to credit risk is influenced mainly by the
individual characteristics of each customer rather than the industry, country or area in which the customers operate and therefore significant concentrations of
credit risk arise primarily when the Group has significant exposure to individual customers. As of December 31, 2017, 82% of the total accounts receivable was
due from the largest customer of the Company.
The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.
Interest Rate Risk
The Company’s interest rate risk arises primarily from cash deposited at banks and the Company doesn’t have any interest-bearing long-term payable/
borrowing, therefore the exposure to interest rate risk is limited.
Currency Risk
The Company is exposed to currency risk primarily from sales and purchases which give rise to receivables, payables that are denominated in a foreign
currency (mainly RMB). The Company has adopted USD as its functional currency, thus the fluctuation of exchange rates between RMB and USD exposes the
Company to currency risk.
The following table details the Company’s exposure as of December 31, 2017 to currency risk arising from recognised assets or liabilities denominated
in a currency other than the functional currency of the entity to which they relate. For presentation purposes, the amounts of the exposure are shown in USD
translated using the spot rate as of December 31, 2017. Differences resulting from the translation of the financial statements of entities into the Company’s
presentation currency are excluded.
Cash and cash equivalents
Net exposure arising from recognised assets and liabilities
76
Exposure to foreign currencies
(Expressed in USD)
As of December 31, 2017
RMB
USD
2,604
2,604
372,330
372,330
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Table of Contents
The following table indicates the instantaneous change in the Company’s net loss that would arise if foreign exchange rates to which the Company has
significant exposure at the end of the reporting period had changed at that date, assuming all other risk variables remained constant.
RMB (against USD)
As of December 31, 2017
increase/(decrease)
in foreign
exchange rates
Effect on net loss
(Expressed in
USD)
5%
(18,486)
-5%
18,486
Results of the analysis as presented in the above table represent an aggregation of the instantaneous effects on each of the Company’s subsidiaries’
net loss measured in the respective functional currencies, translated into USD at the exchange rate ruling at the end of the reporting period for presentation
purposes.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the
Company which expose the Company to foreign currency risk at the end of the reporting period, including inter-company payables and receivables within the
Company which are denominated in a currency other than the functional currencies of the lender or the borrower. The analysis excludes differences that would
result from the translation of the financial statements of subsidiaries into the Company’s presentation currency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Annual Report on Form 10-K are our Consolidated Financial Statements, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Our
disclosure controls and procedures are designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our
principal executive officer and principal financial officer by others within our organization. Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures
as of December 31, 2017 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial
officer as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.
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Table of Contents
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the
participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2017. Our internal control over financial reporting as of December 31, 2017, has been audited
and attested to by BDO China Shu Lun Pan Certified Public Accountants LLP, or BDO China, an independent registered public accounting firm, as stated in its
report, which is included herein.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2017, there were no changes in our internal control over financial reporting that materially affected, or that are
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As previously disclosed on a Current Report on Form 8-K filed on June 1, 2017, the Company authorized a share repurchase program (the “Share
Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to
exceed $10 million. The table below summarizes purchases made by or on behalf of the Company or affiliated purchasers as defined in Regulation S-K under
the Share Purchase Program.
Period
Total number of
shares
purchased
Average price
paid per share
Total number of
shares
purchased as part
of publicly
announced plans
or programs
Maximum dollar value
of shares that may yet
be purchased under
the plans or
programs
June 9, 2017 ~ June 30, 2017
July 1, 2017 ~ September 30, 2017
October 1, 2017 ~ December 31, 2017
Total
170,169
114,156
142,469
426,794
$
$
$
$
7.98
9.51
10.77
9.32
170,169
114,156
142,469
426,794
6,022,071
In December 2017, the Company entered into Share Purchase Agreements with two investors and three of its executive officers (collectively, the
“Purchasers”), pursuant to which the Company sold to the Purchasers an aggregate of 1,208,334 shares (the “Shares”) of the Company’s common stock at
$12.00 per share, for total gross proceeds of approximately $14,500,000. The issuance to the two investors and the executive officers was made in reliance on
the exemption from registration provided by Regulation S and Section 4(a)(2), respectively, under the Securities Act.
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
We will file with the SEC a definitive Proxy Statement for our Annual Meeting of Stockholders (the “2017 Proxy Statement”) not later than 120 days after
the fiscal year ended December 31, 2017. The information required by this item is incorporated herein by reference to the information contained in the 2017
Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the information contained in the 2017 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the information contained in the 2017 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the information contained in the 2017 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the information contained in the 2017 Proxy Statement.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
Description
Plan of reorganization and exchange agreement (1)
Agreement and Plan of Merger, dated November 13, 2012 (17)
Amendment No. 1 to Agreement and Plan of Merger, dated January 15, 2013 (18)
Amendment No. 2 to Agreement and Plan of Merger, dated January 31, 2013 (19)
Amendment No. 3 to Agreement and Plan of Merger, dated February 5, 2013 (20)
Articles of Incorporation of Cellular Biomedicine Group, Inc.(40)
Amended and Restated Bylaws of Cellular Biomedicine Group, Inc.(41)
Form of lock-up agreement (1)
2007 Stock Incentive Plan, dated June 14, 2007 (3)
2008 Employees and Consultants Stock Option Plan, dated August 20, 2008 (8)
2009 Stock Option Plan (10)
2011 Incentive Stock Option Plan (22)
Amended and Restated 2011 Incentive Stock Option Plan (23)
2013 Stock Incentive Plan (28)
2014 Stock Incentive Plan (29)
Amendment No. 1 to 2014 Stock Incentive Plan (38)
Consulting Employment Agreement between EastBridge Investment Group Corporation and Keith Wong dated June 1, 2005 (1)
Consulting Employment Agreement between EastBridge Investment Group Corporation and Norm Klein dated June 1, 2005 (1)
Listing Agreement signed with Amonics Limited, dated November 23, 2006 (English translation) (2)
Listing Agreement signed with Tianjin Hui Hong Heavy Steel Construction Co., Ltd, dated December 3, 2006 (English translation) (2)
Listing Agreement signed with NingGuo Shunchang Machinery Co., Ltd., dated January 6, 2007 (English translation) (2)
Listing Agreement with Hefe Ginko Real Estate Company, Ltd., dated July 24, 2007 (English translation) (4)
Share Exchange Agreement with AREM Wine Pty, Ltd., dated September 21, 2007 (5)
Listing and Consultant Agreement with AREM Wine Pty, Ltd., dated September 27, 2007 (6)
Listing Agreement with Beijing Zhong Zhe Huang Holding Company, Ltd., dated October 4, 2007 (English translation) (7)
Listing Agreement with Qinhuangdao Huangwei Pharmaceutical Company Limited, dated December 29, 2007 (English translation) (12)
US Listing Agreement with Anhui Wenda Educational & Investment Management Corporation, dated April 12, 2008 (English translation) (12)
Stock Purchase Agreement with Ji-Bo Pipes & Valves Company, dated September 21, 2008 (9)
Stock Purchase Agreement with Aoxing Corporation, dated September 21, 2008 (9)
US Listing Agreement with Foshan Jinkuizi Technology Limited Company, dated September 22, 2008 (English translation) (12)
Letter Agreement with Alpha Green Energy Limited, dated February 18, 2009 (12)
Listing Agreement with AREM Pacific Corporation, dated April 30, 2009 (12)
Change in Terms Agreement between EastBridge Investment Group Corporation and Goldwater Bank, N.A. dated May 6, 2009 (12)
Listing Agreement with SuZhou KaiDa Road Pavement Construction Company Limited, dated November 3, 2009 (English translation) (12)
Listing Agreement with Long Whole Enterprises, Ltd., dated November 28, 2009 (English translation) (12)
Listing Agreement with Beijing Tsingda Century Education Investment and Consultancy Limited, dated December 24, 2009 (English translation)
(12)
Listing Agreement with StrayArrow International Limited, dated April 11, 2010 (English translation) (13)
Listing Agreement with Hangzhou Dwarf Technology Ltd., dated September 26, 2010 (English translation) (14)
Bridge Capital Raise Agreement with FIZZA, LLC, dated December 1, 2010 (confidential treatment requested for redacted portions) (15)
Stock Purchase Agreement with An Lingyan, dated December 14, 2011 (21)
Form of Listing Agreement (16)
Tsingda Stock Purchase Agreement dated as of December 17, 2012 (16)
Employment Agreement with Wen Tao (Steve) Liu, dated February 6, 2013(30)
Employment Agreement with Wei (William) Cao, dated February 6, 2013(30)
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10.29
10.30
10.31
10.32
10.33
10.34
10.35
Employment Agreement with Andrew Chan, February 6, 2013(30)
Form of Director Agreement (30)
Amendment to Employment Agreement with Wen Tao (Steve) Liu, dated August 20, 2013(30)
Amendment to Employment Agreement with Wei (William) Cao, dated August 20, 2013(30)
Amendment to Employment Agreement with Andrew Chan, dated August 20, 2013(30)
Advisory Services Agreement, dated August 23, 2013, by and between Cellular Biomedicine Group Inc. and HealthCrest AG(30)
Purchase Agreement, dated September 10, 2013, by and between Cellular Biomedicine Group (Shanghai) Ltd. and Fisher Scientific Worldwide
(Shanghai) Co., Ltd. (30)
10.36
Technical Service Contract, dated September 22, 2013, by and between Cellular Biomedicine Group (Shanghai) Ltd. and National Engineering
10.37
10.38
10.39
10.40
10.41
10.42
10.43
Research Center of Tissue Engineering. (30)
Clinical Trial Agreement, dated November 6, 2013, by and between Cellular Biomedicine Group (Shanghai) Ltd. and Renji Hospital(30)
Clinical Trial Agreement, dated December 20, 2013, by and between Cellular Biomedicine Group (Shanghai) Ltd. and China Armed Police General
Hospital(30)
Consulting Agreement with Wei (William) Cao, dated February 7, 2016 (32)
Form of Subscription Agreement (24)
Employment Agreement with Bizuo (Tony) Liu, dated January 3, 2014 (25)
Framework Agreement by and among the Company, Agreen Biotech Co. Ltd. and its Shareholders, dated August 02, 2014 (26)
Technology Transfer Agreement by and between the Company and the General Hospital of the Chinese People’s Liberation Army, dated
February 4, 2015 (32)
10.44
Asset Purchase Agreement, dated June 8, 2015, by and among the Company, Blackbird BioFinance, LLC, Scott Antonia and Sam Shrivastava
(27)
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
Patent Transfer Agreement, dated November 16, 2015, by and between CBMG Shanghai and China Pharmaceutical University (32)
Clinical Trial Agreement, dated December 15, 2015, by and between CBMG Shanghai and Renji Hospital (32)
Share Purchase Agreement, dated February 4, 2016, by and between the Company and Dangdai International Group Co., Limited (35)
Lease Agreement, dated January 1, 2017, by and between CBMG Shanghai and Shanghai Chuangtong Industrial Development Co., Ltd. (32)
Consulting agreement with Wen Tao (Steve) Liu, dated February 7, 2016 (33)
Clinical Trial Agreement, dated February 16, 2016, by and between CBMG Shanghai and Shanghai Tongji Hospital (33)
Agreement on Termination of Cooperation with Jilin Luhong Real Estate Development Co., Ltd. (34)
Lease agreement of office building located at Room E2301 and 1125, Zone A, 2/F, Wuxi (Huishan) Life Science & Technology Industrial Park,
1619 Huishan Avenue, Wuxi, the P.R.C. (34)
10.53
Lease agreement of office building located at Zone B, 2/F, Building No.7, Block C, Wuxi (Huishan) Life Science & Technology Industrial Park, 1699
10.54
10.55
10.56
10.57
10.58
10.59
10.69
10.70
10.71
14.1
21
23.1
31
32
Huishan Avenue, Wuxi, the P.R.C.(34)
Agreement, dated as of April 11, 2016, by and between the Company and Bizuo (Tony) Liu (36)
Letter Agreement, dated November 11, 2016, by and between the Company and Gang Ji (37)
Employment Agreement, dated March 3, 2017, by and between the Company and Bizuo (Tony) Liu (39)
Employment Agreement, dated March 3, 2017, by and between the Company and Andrew Chan(39)
Employment Agreement, dated March 3, 2017, by and between the Company and Yihong Yao(39)
Lease Agreement, dated November 16, 2016, by and between CBMG Shanghai and Shanghai Guilin Industrial Co., Ltd. (39)
Lease Agreement, dated November 16, 2016, by and between CBMG Shanghai and Shanghai Guilin Industrial Co., Ltd. (39)
Share Purchase Agreement, dated December 15, 2017, by and among the Company and its executive officers (42)
Share Purchase Agreement, dated December 26, 2017, by and among the Company and certain investors (43)
Code of Ethics for EastBridge Investment Group Corporation (1)
Subsidiaries of the Company *
Consent of BDO China Shu Lun Pan Certified Public Accountants LLP *
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer and Chief Financial Officer*
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
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101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
———————
1.
2.
3.
4.
5.
6.
7.
8.
Incorporated by reference filed with the Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on October 30, 2006 (File
No. 000-52282)
Incorporated by reference filed with the Registration Statement on Form 10-SB/A filed with the Securities and Exchange Commission on February 27, 2007
(File No. 000-52282)
Incorporated by reference filed with the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 19, 2007 (File No.
333-143878)
Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on July 20, 2007 (File No. 000-52282)
Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on September 25, 2007 (File No. 000-52282)
Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on October 1, 2007 (File No. 000-52282)
Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on October 9, 2007 (File No. 000-52282)
Incorporated by reference filed with the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 22, 2008 (File
No. 333-153129)
Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on October 22, 2008 (File No. 000-52282)
9.
10. Incorporated by reference filed with the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 15, 2009 (File No.
333-158583)
11. Incorporated by reference filed with the Form 8-K/A filed with the Securities and Exchange Commission on December 12, 2013 (File No. 000-52282)
12. Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on April 15, 2010 (File No. 000-52282)
13. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on July 14, 2010 (File No. 000-52282)
14. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on November 12, 2010 (File No. 000-52282
15. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on December 7, 2010 (File No. 000-52282)
16. Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on June 18, 2013 (File No. 000-52282)
17. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on November 20, 2012 (File No. 000-52282)
18. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on January 22, 2013 (File No. 000-52282)
19. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on February 4, 2013 (File No. 000-52282)
20. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on February 12, 2013 (File No. 000-52282)
21. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on January 3, 2012 (File No. 000-52282)
22. Incorporated by reference filed with the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 7, 2012 (File No.
333-179974)
23. Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on April 4, 2013 (File No. 000-52282)
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24. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on December 16, 2013 (File No. 000-52282)
25. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on January 3, 2014 (File No. 000-52282)
26. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on October 2, 2014 (File No. 001-36498)
27. Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on July 2, 2015 (File No. 001-36498)
28. Incorporated by reference filed with Schedule 14A filed with the Securities and Exchange Commission on November 21, 2013 (File No. 000-52282)
29. Incorporated by reference filed with Schedule 14A filed with the Securities and Exchange Commission on September 23, 2014 (File No. 001-36498)
30 Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on April 15, 2014 (File No. 000-52282).
31 Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on March 31, 2015 (File No. 001-36498).
32 Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on March 14, 2016 (File No. 001-36498).
33 Incorporated by reference filed with the Form 10-Q filed with the Securities and Exchange Commission on May 9, 2016 (File No. 001-36498).
34 Incorporated by reference filed with the Form 10-Q filed with the Securities and Exchange Commission on August 8, 2016 (File No. 001-36498).
35 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on February 4, 2016 (File No. 000- 36498).
36 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on April 15, 2016 (File No. 000- 36498).
37 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on November 15, 2016 (File No. 000- 36498).
38 Incorporated by reference filed with Schedule 14A/A filed with the Securities and Exchange Commission on March 23, 2017 (File No. 001-36498)
39 Incorporated by reference filed with the Form 10-K filed with the Securities and Exchange Commission on March 13, 2017 (File No. 001-36498).
40 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on January 8, 2013 (File No. 000-52282)
41 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on September 21, 2016 (File No. 000-36498).
42 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on December 21, 2017 (File No. 000-36498).
43 Incorporated by reference filed with the Form 8-K filed with the Securities and Exchange Commission on December 28, 2017 (File No. 000-36498).
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
Date: March 5, 2018
Cellular Biomedicine Group, Inc.
By:
/s/ Bizou (Tony) Liu
Bizuo (Tony) Liu
Chief Executive Officer and Chief Financial Officer
(principal executive officer and financial and accounting
officer)
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature
Title
/s/ Terry A. Belmont
Terry A. Belmont
Chairman of the Board of Directors
/s/ Bizuo (Tony) Liu
Bizuo (Tony) Liu
Chief Executive Officer and Chief Financial Officer
(principal executive officer and financial and accounting officer)
/s/ Wen Tao (Steve) Liu
Wen Tao (Steve) Liu
/s/ Hansheng Zhou
Hansheng Zhou
/s/ Nadir Patel
Nadir Patel
/s/ Chun Kwok Alan Au
Chun Kwok Alan Au
/s/ Gang Ji
Gang Ji
/s/ Bosun S. Hau
Bosun S. Hau
Director
Director
Director
Director
Director
Director
84
Date
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
TABLE OF CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cellular Biomedicine Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cellular Biomedicine Group, Inc. and its subsidiaries and variable interest entities (the
“Company”) as of December 31, 2017 and 2016 and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31,
2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 5, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
We have served as the Company’s auditor since 2015.
Shenzhen, the People’s Republic of China
March 5, 2018
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cellular Biomedicine Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Cellular Biomedicine Group, Inc. and its subsidiaries and variable interest entities (the “Company”)
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated March 5,
2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures, Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
Shenzhen, the People’s Republic of China
March 5, 2018
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful amounts of $10,789
and $10,163 as of December 31, 2017 and December 31, 2016, respectively
Other receivables
Prepaid expenses
Total current assets
Investments
Property, plant and equipment, net
Goodwill
Intangibles, net
Long-term prepaid expenses and other assets
Total assets (1)
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable
Accrued expenses
Taxes payable
Other current liabilities
Total current liabilities
Other non-current liabilities
Total liabilities (1)
Commitments and Contingencies (note 13)
Preferred stock, par value $.001, 50,000,000 shares
authorized; none issued and outstanding as of
December 31, 2017 and 2016, respectively
Common stock, par value $.001, 300,000,000 shares authorized;
15,615,558 and 14,281,378 issued; and 15,188,764 and 14,281,378 outstanding,
as of December 31, 2017 and 2016, respectively
Treasury stock at cost; 426,794 and nil shares of common stock
as of December 31, 2017 and December 31, 2016, respectively
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2017
December 31,
2016
$
21,568,422
$
39,252,432
202,887
902,940
1,852,695
24,526,944
269,424
12,973,342
7,678,789
12,419,692
3,294,105
61,162,296
225,287
1,097,327
28,875
2,324,632
3,676,121
183,649
3,859,770
$
$
39,974
412,727
986,951
40,692,084
509,424
4,117,739
7,678,789
14,092,581
1,537,850
68,628,467
216,154
1,168,787
28,875
950,220
2,364,036
370,477
2,734,513
$
$
-
-
15,616
(3,977,929)
14,281
-
172,691,339
(111,036,997)
(389,503)
57,302,526
152,543,052
(85,546,687)
(1,116,692)
65,893,954
$
61,162,296
$
68,628,467
(1) The Company’s consolidated assets as of December 31, 2017 and 2016 included $21,775,087 and $9,626,171, respectively, of assets of variable interest
entities, or VIEs, that can only be used to settle obligations of the VIEs. Each of the following amounts represent the balances as of December 31, 2017
and 2016, respectively. These assets include cash and cash equivalents of $2,337,173 and $4,021,992; other receivables of $773,384 and $370,702;
prepaid expenses of $1,750,509 and $777,445; property, plant and equipment, net, of $12,477,315 and $2,398,576; intangibles of $1,516,449 and
$1,613,582; and long-term prepaid expenses and other assets of $2,920,257 and $443,874. The Company’s consolidated liabilities as of December 31,
2017 and 2016 included $2,688,520 and $1,372,391, respectively, of liabilities of the VIEs whose creditors have no recourse to the Company. These
liabilities include accounts payable of $181,231 and $161,825; other payables of $1,631,582 and $407,769; payroll accrual of $682,248 and
$792,706;deferred income of $9,810 and nil;and other non-current liabilities of $183,649 and $10,091. See further description in Note 4, Variable Interest
Entities.
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Net sales and revenue
Operating expenses:
Cost of sales
General and administrative
Selling and marketing
Research and development
Impairment of investments
Total operating expenses
Operating loss
Other income:
Interest income
Other income
Total other income
Loss before taxes
CELLULAR BIOMEDICINE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended
December 31,
2016
2017
$
336,817
$
627,930
$
162,218
12,780,483
360,766
14,609,917
-
27,913,384
(27,576,567)
860,417
11,670,506
425,040
11,475,587
4,611,714
29,043,264
(28,415,334)
2015
2,505,423
1,880,331
13,068,255
709,151
7,573,228
123,428
23,354,393
(20,848,970)
133,621
1,955,086
2,088,707
(25,487,860)
78,943
132,108
211,051
(28,204,283)
42,220
630,428
672,648
(20,176,322)
Income taxes (expenses) credit
(2,450)
(4,093)
728,601
Net loss
Other comprehensive income (loss):
Cumulative translation adjustment
Unrealized gain (loss) on investments, net of tax
Reclassification adjustments, net of tax, in connection with other-than-temporary impairment of
investments
Total other comprehensive income (loss):
$ (25,490,310)
$ (28,208,376)
$ (19,447,721)
967,189
(240,000)
-
727,189
(743,271)
5,300,633
(307,950)
(1,376,540)
(5,557,939)
(1,000,577)
-
(1,684,490)
Comprehensive loss
Net loss per share
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$ (24,763,121)
$ (29,208,953)
$ (21,132,211)
$
$
(1.78)
$
(1.78)
$
(2.09)
$
(2.09)
$
(1.70)
(1.70)
14,345,604
14,345,604
13,507,408
13,507,408
11,472,306
11,472,306
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Balance at December
31, 2014
Common stock issued
with Private
Placement
Memorandum ("PPM")
Common stock issued
for
acquisition of
intangible assets
Restricted stock grants
Accrual of stock
options
Exercise of stock
options
Unrealized loss on
investments, net of tax
Foreign currency
translation
Net loss
Balance at December
31, 2015
Common stock issued
with PPM and other
financing
Restricted stock grants
Accrual of stock
options
Exercise of stock
options
Unrealized loss on
investments, net of tax
Reclassification
adjustments, net of
tax, in connection with
other-than-temporary
impairment of
investments
Foreign currency
translation
Net loss
Balance at December
31, 2016
Common stock issued
with PPM
Restricted stock grants
Accrual of stock
options
Exercise of stock
options
Treasury stock
purchase
Unrealized loss on
investments, net of tax
Foreign currency
translation
Net loss
Balance at December
31, 2017
CELLULAR BIOMEDICINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Preferred Stock
Treasury Stock
Additional
Shares
Amount
Shares
Amount
Shares
Amount
Paid in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
10,990,335
10,990
515,786
516
46,867
6,253
-
152,404
-
-
-
47
6
-
152
-
-
-
11,711,645
11,711
2,348,888
24,660
-
196,185
-
-
-
-
2,349
25
-
196
-
-
-
-
14,281,378
14,281
1,208,334
68,446
-
57,400
-
-
-
-
1,208
69
-
58
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
15,615,558
$
15,616
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(426,794)
(3,977,929)
-
-
-
-
-
-
75,467,316
(37,890,590)
1,568,375
Total
39,156,091
.
18,584,854
1,481,462
410,320
7,182,117
682,303
-
-
-
-
18,584,338
1,481,415
410,314
7,182,117
682,151
-
-
-
-
-
-
-
-
(1,376,540)
(1,376,540)
-
(19,447,721)
(307,950)
-
(307,950)
(19,447,721)
103,807,651
(57,338,311)
(116,115)
46,364,936
42,397,525
709,472
4,742,920
885,484
-
-
-
-
-
-
-
-
-
-
-
-
-
-
42,399,874
709,497
4,742,920
885,680
5,300,633
5,300,633
(5,557,939)
(5,557,939)
-
(28,208,376)
(743,271)
-
(743,271)
(28,208,376)
152,543,052
(85,546,687)
(1,116,692)
65,893,954
14,494,832
832,950
4,512,192
308,313
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,496,040
833,019
4,512,192
308,371
(3,977,929)
(240,000)
(240,000)
-
(25,490,310)
967,189
-
967,189
(25,490,310)
(426,794)
$
(3,977,929)
$
172,691,339
$ (111,036,997)
$
(389,503)
$
57,302,526
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
Loss on disposal of assets
Stock based compensation expense
Other than temporary impairment on investments
Realized losses from sale of investments
(Reversal) of inventory provision
Allowance for doubtful account
Decrease in fair value of accrued expenses for the acquisition of intangible assets
Changes in operating assets and liabilities:
Accounts receivable
Other receivables
Inventory
Prepaid expenses
Taxes recoverable
Other current assets
Long-term prepaid expenses and other assets
Accounts payable
Accrued expenses
Advance payable to related party
Other current liabilities
Taxes payable
Other non-current liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired
Proceed from sale of investments, net of issuance cost paid
Purchases of intangible assets
Purchases of property, plant and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock
Proceeds from exercise of stock options
Repurchase of treasury stock
Net cash provided by financing activities
For the Year Ended
December 31,
2017
2016
2015
$ (25,490,310)
$ (28,208,376)
$ (19,447,721)
2,985,963
317
5,345,211
-
-
-
-
-
(160,628)
(467,985)
-
(812,675)
-
-
(1,005,029)
(814)
(118,968)
-
1,339,866
-
(208,340)
(18,593,392)
-
-
(23,734)
(10,169,134)
(10,192,868)
2,635,001
2,156
5,452,417
4,611,714
-
(115,391)
10,163
-
537,155
(156,672)
514,734
(669,598)
150,082
-
(643,673)
(28,205)
356,420
-
(640,573)
28,875
296,036
(15,867,735)
-
-
(56,519)
(2,676,888)
(2,733,407)
2,094,644
1,444
7,592,438
123,428
5,178
123,848
-
(345,882)
(497,937)
(143,711)
(142,486)
181,679
(150,082)
110,347
(384,432)
(166,032)
396,557
(30,216)
113,919
(814,288)
(371,793)
(11,751,098)
(1,568,627)
1,480
(4,260,420)
(1,874,538)
(7,702,105)
14,496,040
308,371
(3,977,929)
10,826,482
42,399,874
885,680
-
43,285,554
18,964,849
682,303
-
19,647,152
EFFECT OF EXCHANGE RATE CHANGES ON CASH
275,768
(316,577)
(79,936)
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
SUPPLEMENTAL CASH FLOW INFORMATION
(17,684,010)
39,252,432
21,568,422
$
24,367,835
14,884,597
39,252,432
$
114,013
14,770,584
14,884,597
$
Cash paid for income taxes
$
2,450
$
6,705
$
108,075
Non-cash investing activities
Acquisition of intangible assets through issuance of the Company's stock
$
-
$
-
$
1,481,462
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1 – DESCRIPTION OF BUSINESS
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
As used in this report, "we", "us", "our", "CBMG", "Company" or "our company" refers to Cellular Biomedicine Group, Inc. and, unless the context
otherwise requires, all of its subsidiaries.
Overview
Cellular Biomedicine Group, Inc. is a clinical stage biopharmaceutical company, principally engaged in the development of therapies for cancer and
degenerative diseases utilizing proprietary cell-based technologies. Our technology includes two major platforms: (i) Immune cell therapy for treatment of a broad
range of cancer indications comprised of technologies in Chimeric Antigen Receptor modified T cells (CAR-T), T-Cell Receptor (TCR), cancer vaccine, and ex
vivo expanded autologous Central Memory T Cells (Tcm), and (ii) human adipose-derived mesenchymal progenitor cells (haMPC) for treatment of joint and
autoimmune diseases. CBMG’s Research & Development are based in China and the U.S., and its manufacturing facilities are based in China in the cities of
Shanghai, Wuxi, and Beijing.
We are focused on developing and marketing safe and effective cell-based therapies based on our cellular platforms, to treat cancer, orthopedic
diseases and metabolic diseases. We have developed proprietary technologies and know-hows in our cell therapy platforms. We are conducting clinical studies
in China with our stem cell based therapies to treat knee osteoarthritis (“KOA”). We have completed a Phase IIb autologous haMPC KOA clinical study and
published its promising results. Led by Shanghai Renji Hospital, one of the largest teaching hospitals in China, we have also completed a Phase I clinical trial of
our off-the-shelf allogeneic haMPC (AlloJoinTM) therapy for treating KOA patients. In addition, we have received an award of $2.29 million grant from California
Institute of Regenerative Medicine’s (CIRM) and we have started manufacturing AlloJoinTM product in California to support preclinical and clinical studies in the
United States for the KOA indication.
Our primary target market is Greater China. We believe that our cell-based therapies will be able to help patients with high unmet medical needs. We
expect to carry out clinical studies leading to the eventual CFDA approval of our products through Biologics License Application (BLA) filings and authorized
clinical centers throughout Greater China.
We have launched multiple clinical trials using our CAR-T products in multiple indications such as DLBCL & ALL. We may also establish partnerships
with other companies for co-development in CAR-T, TCR-T and stem cell based therapies. We are striving to build a highly competitive research and
development function, a translational medicine unit, along with a well-established cellular manufacturing capability and ample capacity, to support the
development of multiple assets in multiple indications. These efforts will allow us to boost the Company's Immuno-Oncology presence and pave the way for
additional future partnerships.
Corporate History
Cellular Biomedicine Group, Inc., (formerly known as EastBridge Investment Group Corporation) was originally incorporated in the State of Arizona on
June 25, 2001 under the name ATC Technology Corporation. ATC Technology Corporation changed its corporate name to EastBridge Investment Group
Corporation in September 2005 and changed its business focus to providing investment related services in Asia.
On November 13, 2012, EastBridge Investment Group Corporation, an Arizona corporation (“EastBridge”), CBMG Acquisition Limited, a British Virgin
Islands company and the Company’s wholly-owned subsidiary (“Merger Sub”) and Cellular Biomedicine Group Ltd. (“CBMG BVI”), a British Virgin Islands
company, entered into a Merger Agreement, pursuant to which CBMG BVI was the surviving entity in a merger with Merger Sub whereby CBMG BVI became a
wholly-owned subsidiary of the Company (the “Merger”). The Merger was consummated on February 6, 2013 (the “Closing Date”).
Also in connection with the Merger, the Company created a new Delaware subsidiary named EastBridge Investment Corp. (“EastBridge Sub”). Pursuant
to a Contribution Agreement by and between the Company and EastBridge Sub dated February 5, 2013, the Company contributed all of its then current assets
and liabilities to EastBridge Sub which continued the business and operations of the Company at the subsidiary level. A copy of the Contribution Agreement is
attached as Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on February 12, 2013.
As a result of the Merger, CBMG BVI and EastBridge Sub became the two direct subsidiaries of the Company.
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CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
In connection with the Merger, effective March 5, 2013, the Company (formerly named “EastBridge Investment Group Corporation”) changed its name
to “Cellular Biomedicine Group, Inc.” In addition in March 2013, the Company changed its corporate headquarters to 530 University Avenue in Palo Alto,
California.
From February 6, 2013 to June 23, 2014, we operated the Company in two separate reportable segments: (i) Biomedicine Cell Therapy (“Biomedicine”);
and (ii) Financial Consulting (“Consulting”). The Consulting segment was conducted through EastBridge Sub. On June 23, 2014, the Company announced the
discontinuation of the Consulting segment as it no longer fit into management’s long-term strategy and vision. The Company is now focusing resources on
becoming a biotechnology company bringing therapies to improve the health of patients in China.
On September 26, 2014, the Company completed its acquisition of Beijing Agreen Biotechnology Co. Ltd. ("AG") and the U.S. patent held by AG’s
founder. AG is a biotech company with operations in China, engaged in the development of treatments for cancerous diseases utilizing proprietary cell
technologies.
At the end of September, 2015, the Company moved its corporate headquarters to 19925 Stevens Creek Blvd., Suite 100 in Cupertino, California. The
Company is a biopharmaceutical company focused on developing therapies to improve the health of patients in China.
NOTE 2 – BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of the Company and all of its subsidiaries and variable interest entities. All
significant inter-company transactions and balances are eliminated upon consolidation. The consolidated financial statements have been prepared in
accordance with the accounting principles generally accepted in the United States of America (“GAAP”).
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are as follows:
Principles of Consolidation
The consolidated financial statements have been prepared in conformity with GAAP, and reflect the accounts and operations of the Company and its
subsidiaries, beginning with the date of their respective acquisition. In accordance with the provisions of Financial Accounting Standards Board (“FASB”),
Accounting Standards Codification (“ASC”) Topic 810, or ASC 810, Consolidation, the Company consolidates any variable interest entity, or VIE, of which it is
the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a
controlling financial interest may also exist in entities, such as variable interest entities, through arrangements that do not involve controlling voting interests. ASC
810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of a VIE that most significantly impact the VIE’s
economic performance, and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE
that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not
considered the primary beneficiary. The Company has determined that it is the primary beneficiary in a VIE—refer to Note 4, Variable Interest Entity. The
Company evaluates its relationships with the VIE on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and
balances have been eliminated in consolidation.
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Use of Estimates
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.
These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period. Management
evaluates these estimates and assumptions on a regular basis. Significant accounting estimates reflected in the Company’s consolidated financial statements
include inventory valuation, account receivable valuation, useful lives of property, plant and equipment and acquired intangibles, the valuation allowance for
deferred income tax assets, valuation of goodwill, valuation of long-lived assets and share-based compensation expense. Actual results could materially differ
from those estimates.
Revenue Recognition
The Company utilizes the guidance set forth in the FASB’s ASC Topic 605, Revenue Recognition, regarding the recognition, presentation and disclosure
of revenue in its financial statements. The Company recognizes revenue when pervasive evidence of an arrangement exists, the price is fixed and determinable,
collection is reasonably assured and delivery of products or services has been rendered.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 2017 and
2016, respectively, cash and cash equivalents include cash on hand and cash in the bank. At times, cash deposits may exceed government-insured limits.
Accounts Receivable
Accounts receivable represent amounts earned but not collected in connection with the Company’s sales of goods or services as of December 31, 2017
and 2016. Account receivables are carried at their estimated collectible amounts.
The Company follows the allowance method of recognizing uncollectible accounts receivable. The Company recognizes bad debt expense based on
specifically identified customers and invoices that are anticipated to be uncollectable. At December 31, 2017 and 2016, allowance of $10,789 and $10,163 was
provided for debtors of certain customers as those debts are unrecoverable from customers, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets
ranging from three to ten years and begins when the related assets are placed in service. Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Plant, property and
equipment are reviewed each year to determine whether any events or circumstances indicate that the carrying amount of the assets may not be recoverable.
We assess the recoverability of the asset by comparing the projected undiscounted net cash flows associated with the related assets over the estimated
remaining life against the respective carrying value.
For the years ended December 31, 2017, 2016 and 2015, depreciation expense was $1,195,705, $850,793 and $573,015, respectively.
Goodwill and Other Intangibles
Goodwill represents the excess of the cost of assets acquired over the fair value of the net assets at the date of acquisition. Intangible assets represent
the fair value of separately recognizable intangible assets acquired in connection with the Company’s business combinations. The Company evaluates its
goodwill and other intangibles for impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred.
The carrying amount of the goodwill at December 31, 2017 and 2016 represents the cost arising from the business combinations in previous years and
no impairment on goodwill was recognized for the years ended December 31, 2017 and 2016.
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Treasury Stock
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The treasury stock is recorded and carried at their repurchase cost. The Company recorded the entire purchase price of the treasury stock as a
reduction of equity. A gain or loss will be determined when treasury stock is reissued or retired, and the original issue price and book value of the stock do not
enter into the accounting. Additional paid-in capital from treasury stock is credited for gains and debited for losses when treasury stock is reissued at prices that
differ from the repurchase cost.
Government Grants
Government grants are recognized in the balance sheet initially when there is reasonable assurance that they will be received and that the enterprise
will comply with the conditions attached to them. When the Company received the government grants but the conditions attached to the grants have not been
fulfilled, such government grants are deferred and recorded as deferred income. The classification of short-term or long-term liabilities is depended on the
management’s expectation of when the conditions attached to the grant can be fulfilled. Grants that compensate the Company for expenses incurred are
recognized as other income in statement of income on a systematic basis in the same periods in which the expenses are incurred.
For the year ended December 31, 2017 and 2016, the Company received government grants of $1,905,213 and $422,839 for purpose of R&D and
related capital expenditure, respectively. Government subsidies recognized as other income in the statement of income for the year ended December 31, 2017
and 2016 were $2,077,486 and $78,542, respectively.
Valuation of long-lived asset
The Company reviews the carrying value of long-lived assets to be held and used, including other intangible assets subject to amortization, when events
and circumstances warrants such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from
such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that
fair market values are reduced for the cost to dispose.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax assets if it is more likely than not that the
related benefit will not be realized.
A full valuation allowance has been established against all net deferred tax assets as of December 31, 2017 and 2016 based on estimates of
recoverability. While the Company has optimistic plans for its business strategy, we determined that such a valuation allowance was necessary given the current
and expected near term losses and the uncertainty with respect to the Company’s ability to generate sufficient profits from its business model.
Share-Based Compensation
The Company periodically uses stock-based awards, consisting of shares of common stock and stock options, to compensate certain officers and
consultants. Shares are expensed on a straight line basis over the requisite service period based on the grant date fair value, net of estimated forfeitures, if any.
We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock-based payment awards. This model requires the input of highly
subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, risk-free interest rates,
the expected term of the option and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of
management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the
future. These assumptions are estimated as follows:
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CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
● Fair Value of Our Common Stock — Our common stock is valued by reference to the publicly-traded price of our common stock.
● Expected Volatility — Prior to the Eastbridge merger, we did not have a history of market prices for our common stock and since the merger, we do not have
what we consider a sufficiently active and readily traded market for our common stock to use historical market prices for our common stock to estimate
volatility. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historical stock price volatility for industry
peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of other public
companies in the stem cell industry similar in size, stage of life cycle and financial leverage. We intend to continue to consistently apply this process using
the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes
available.
● Risk-Free Interest Rate — The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of our awards. The
risk-free interest rate assumption is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option
group.
● Expected Term — The expected term represents the period that our stock-based awards are expected to be outstanding. The expected terms of the awards
are based on a simplified method which defines the life as the average of the contractual term of the options and the weighted-average vesting period for all
open tranches.
● Expected Dividend Yield — We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.
Consequently, we used an expected dividend yield of zero.
In addition to the assumptions used in the Black-Scholes option-pricing model, the amount of stock option expense we recognize in our consolidated
statements of operations includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will
continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Changes in
the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized
in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will
result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the
previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in our
consolidated financial statements.
Fair Value of Financial Instruments
Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company uses various methods
including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable inputs. The Company uses valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Company is required to provide the following
information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or
similar assets or liabilities.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models
and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable
assumptions and projections in determining the fair value assigned to such assets.
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CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
All transfers between fair value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The inputs
or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investment in those instruments.
The carrying amounts of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, income tax payable
and related party payable approximate fair value due to their short maturities.
Investments
The fair value of “investments” is dependent on the type of investment, whether it is marketable or non-marketable.
Marketable securities held by the Company are held for an indefinite period of time and thus are classified as available-for-sale securities. The fair value
is based on quoted market prices for the investment as of the balance sheet date. Realized investment gains and losses are included in the statement of
operations, as are provisions for other than temporary declines in the market value of available for-sale securities. Unrealized gains and unrealized losses
deemed to be temporary are excluded from earnings (losses), net of applicable taxes, as a component of other comprehensive income (loss). Factors
considered in judging whether an impairment is other than temporary include the financial condition, business prospects and creditworthiness of the issuer, the
length of time that fair value has been less than cost, the relative amount of decline, and the Company’s ability and intent to hold the investment until the fair
value recovers.
Basic and Diluted Net Loss Per Share
Diluted net loss per share reflects potential dilution from the exercise or conversion of securities into common stock. The dilutive effect of the Company's
share-based awards is computed using the treasury stock method, which assumes that all share-based awards are exercised and the hypothetical proceeds
from exercise are used to purchase common stock at the average market price during the period. Share-based awards whose effects are anti-dilutive are
excluded from computing diluted net loss per share.
Foreign Currency Translation
The Company's financial statements are presented in U.S. dollars ($), which is the Company’s reporting currency, while some of the Company’s
subsidiaries’ functional currency is Chinese Renminbi (RMB). Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the
date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency
transaction in the consolidated statements of operations. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency
rate of exchange ruling at the balance sheet date. Any differences are recorded as an unrealized gain or loss on foreign currency translation in the statements of
operations and comprehensive loss. In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into USD from
RMB using the rate of exchange prevailing at the applicable balance sheet date and the statements of income and cash flows are translated at an average rate
during the reporting period. Adjustments resulting from the translation are recorded in shareholders' equity as part of accumulated other comprehensive income.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations.
Comprehensive Loss
We apply ASC No. 220, Comprehensive Income (ASC 220). ASC 220 establishes standards for the reporting and display of comprehensive income or
loss, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. Our
comprehensive loss was $24,763,121, $29,208,953 and $21,132,211 for the years ended December 31, 2017, 2016 and 2015, respectively.
Segment Information
FASB ASC Topic 280, “Segment Reporting” establishes standards for reporting information about reportable segments. Operating segments are defined
as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or
decision-making group in deciding how to allocate resources and in assessing performance. Following the discontinuance of our consulting business, we
operate in a single reportable segment.
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CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Recent Accounting Pronouncements
Accounting pronouncements adopted during the year ended December 31, 2017
In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting
for employee share-based payment transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after
December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The adoption of the ASU 2016-09 did not have a material
impact on the Company’s consolidated financial statements.
Accounting pronouncements not yet effective
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which provides financial statement preparers with an option to reclassify
stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim
period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be
applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax
rate in the Tax Cuts and Jobs Act is recognized. We do not expect the adoption of ASU 2018-02 to have a material impact on our consolidated financial
statements.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and
Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope
Exception” (“ASU 2017-11”), which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments)
with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this ASU are effective
for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently
evaluating the impact of the adoption of ASU 2017-11 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-
09”), which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification
accounting under Topic 718. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for
which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made
available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. We do not expect the
adoption of ASU 2017-09 to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-
20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”), which clarifies the scope of
the nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that the derecognition of all businesses and nonprofit activities (except those related
to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation
guidance in Subtopic 810-10. The amendments in this ASU also provide guidance on the accounting for what often are referred to as partial sales of nonfinancial
assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other non-controlled investee. The amendments in this
ASU are effective for annual reporting reports beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities
may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that
reporting period. We do not expect the adoption of ASU 2017-05 to have a material impact on our consolidated financial statements.
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CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU
2017-04”), which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill
impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The
new guidance does not amend the optional qualitative assessment of goodwill impairment. Public business entity that is a U.S. Securities and Exchange
Commission filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating
the impact of the adoption of ASU 2017-04 on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do
not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not
expect the adoption of ASU 2016-18 to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-
coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing;
contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in
securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for assets held at amortized cost
basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current
GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is
deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit
losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a
write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The
amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any
other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842,
Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash
flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified
as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing
between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases
in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in
Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The
amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public
business entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on
our consolidated financial statements.
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CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to be measured at fair value with changes in the
fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).
The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair
value option for financial instruments. In addition, the amendments in this update eliminate the requirement for to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public
entities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted.
We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the
revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The
FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”) in August 2015. The
amendments in ASU 2015-14 defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans
should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within
that reporting period. Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”) in March 2016, ASU No. 2016-10, “Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) in April 2016, ASU No. 2016-12, “Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), and ASU No. 2016-20, “Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), respectively. The amendments in ASU 2016-08 clarify the
implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or
service before it is transferred to the customers. ASU 2016-10 clarifies guidelines related to identifying performance obligations and licensing implementation
guidance contained in the new revenue recognition standard. The updates in ASU 2016-10 include targeted improvements based on input the FASB received
from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in practice
potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis.
ASU 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition.
Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the
presentation of sales taxes and other similar taxes collected from customers. The amendments in ASU 2016-20 represents changes to make minor corrections
or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative
cost to most entities. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as ASU 2014-
09. The Company will adopt ASC Topic 606, Revenue from Contracts with Customers , using the modified retrospective transition approach. Under this
approach, ASC Topic 606 would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of
January 1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized
using a cumulative effect adjustment to the opening balance of accumulated deficit. The Company does not anticipate the adoption of these ASUs to have
material changes to its revenue recognition practices nor material impact on its consolidated financial statements.
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Table of Contents
NOTE 4 – VARIABLE INTEREST ENTITY
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with
ownership of the entity, and therefore the Company is the primary beneficiary of the entity. Cellular Biomedicine Group Ltd (Shanghai) (“CBMG Shanghai”) and
its subsidiaries are variable interest entities (VIEs), through which the Company conducts stem cell and immune therapy research and clinical trials in China. The
registered shareholders of CBMG Shanghai are Lu Junfeng and Chen Mingzhe, who together own 100% of the equity interests in CBMG Shanghai. The initial
capitalization and operating expenses of CBMG Shanghai are funded by our wholly foreign-owned enterprise (“WFOE”), Cellular Biomedicine Group Ltd. (Wuxi)
(“CBMG Wuxi”). The registered capital of CBMG Shanghai is ten million RMB and was incorporated on October 19, 2011. AG was 100% acquired by CBMG
Shanghai in September 2014. The registered capital of AG is five million RMB and was incorporated on April 27, 2011. In 2017, CBMG Shanghai established
two subsidiaries in Wuxi and Shanghai. Wuxi Cellular Biopharmaceutical Group Ltd. (“WX SBM”) was established on January 17, 2017 with registered capital of
RMB 20 million and wholly owned by CBMG Shanghai. Shanghai Cellular Biopharmaceutical Group Ltd. (“SH SBM”) was established on January 18, 2017 with
registered capital of RMB 100 million and wholly owned by CBMG Shanghai. For the year ended December 31, 2017, 2016 and 2015, 3%, 78% and 80% of the
Company revenue is derived from VIEs respectively.
In February 2012, CBMG Wuxi provided financing to CBMG Shanghai in the amount of $1,587,075 for working capital purposes. In conjunction with the
provided financing, exclusive option agreements were executed granting CBMG Wuxi the irrevocable and exclusive right to convert the unpaid portion of the
provided financing into equity interest of CBMG Shanghai at CBMG Wuxi’s sole and absolute discretion. CBMG Wuxi and CBMG Shanghai additionally executed
a business cooperation agreement whereby CBMG Wuxi is to provide CBMG Shanghai with technical and business support, consulting services, and other
commercial services. The shareholders of CBMG Shanghai pledged their equity interest in CBMG Shanghai as collateral in the event CBMG Shanghai does not
perform its obligations under the business cooperation agreement.
The Company has determined it is the primary beneficiary of CBMG Shanghai by reference to the power and benefits criterion under ASC Topic 810,
Consolidation. This determination was reached after considering the financing provided by CBMG Wuxi to CBMG Shanghai is convertible into equity interest of
CBMG Shanghai and the business cooperation agreement grants the Company and its officers the power to manage and make decisions that affect the
operation of CBMG Shanghai.
There are substantial uncertainties regarding the interpretation, application and enforcement of PRC laws and regulations, including but not limited to the
laws and regulations governing our business or the enforcement and performance of our contractual arrangements. See Risk Factors below regarding “Risks
Related to Our Structure”. The Company has not provided any guarantees related to VIEs and no creditors of VIEs have recourse to the general credit of the
Company.
As the primary beneficiary of CBMG Shanghai and its subsidiaries, the Company consolidates in its financial statements the financial position, results of
operations, and cash flows of CBMG Shanghai and its subsidiaries, and all intercompany balances and transactions between the Company and CBMG
Shanghai and its subsidiaries are eliminated in the consolidated financial statements.
The Company has aggregated the financial information of CBMG Shanghai and its subsidiaries in the table below. The aggregate carrying value of
assets and liabilities of CBMG Shanghai and its subsidiaries (after elimination of intercompany transactions and balances) in the Company’s consolidated
balance sheets as of December 31, 2017 and 2016 are as follows:
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Assets
Liabilities
Table of Contents
Cash
Other receivables
Prepaid expenses
Total current assets
Property, plant and equipment, net
Intangibles
Long-term prepaid expenses and other assets
Total assets
Accounts payable
Other payables
Payroll accrual
Deferred income
Total current liabilities
Other non-current liabilities
Total liabilities
NOTE 5 – OTHER RECEIVABLES
December 31,
December 31,
2017
2016
$
$
$
$
$
$
2,337,173
773,384
1,750,509
4,861,066
12,477,315
1,516,449
2,920,257
21,775,087
181,231
1,631,582
682,248
9,810
2,504,871
$
$
$
4,021,992
370,702
777,445
5,170,139
2,398,576
1,613,582
443,874
9,626,171
161,825
407,769
792,706
-
1,362,300
183,649
2,688,520
$
10,091
1,372,391
The Company pays deposits on various items relating to office expenses. Management has classified these deposits as receivables as the intention is to
recover these deposits in less than 12 months. As of December 31, 2017 and 2016 the amounts of other receivables was $902,940 and $412,727, respectively.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2017 and 2016, property, plant and equipment, carried at cost, consisted of the following:
Office equipment
Manufacturing equipment
Computer equipment
Leasehold improvements
Construction in progress
Less: accumulated depreciation
December 31,
2017
December 31,
2016
$
$
105,114
4,781,936
233,539
4,196,589
7,498,272
80,485
3,347,458
162,769
1,912,573
1,172,433
16,815,450
(3,842,108)
12,973,342
$
6,675,718
(2,557,979)
4,117,739
$
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $1,195,705, $850,793 and $573,015, respectively.
NOTE 7 – INVESTMENTS
The Company’s investments represent the investment in equity securities listed in Over-The-Counter (“OTC”) markets of the United States of America:
Equity position in Alpha Lujo, Inc.
Equity position in Arem Pacific Corporation
December 31, 2017
Total
Equity position in Alpha Lujo, Inc.
Equity position in Arem Pacific Corporation
December 31, 2016
Total
Gross
Unrealized
Gains
Adjusted Cost
$
251,388 $
480,000
- $
-
Gross
Unrealized
Losses less
than 12
months
Gross
Unrealized
Losses more
than 12
months
(221,964) $
-
Market or Fair
Value
- $
(240,000)
29,424
240,000
$
731,388 $
- $
(221,964) $
(240,000) $
269,424
Gross
Unrealized
Gains
Gross
Unrealized
Losses more
than 12
months
- $
-
- $
Adjusted Cost
$
251,388 $
480,000
$
731,388 $
Gross
Unrealized
Losses less
than 12
months
(221,964) $
-
- $
-
Market or Fair
Value
29,424
480,000
- $
(221,964) $
509,424
There were no sale of investments for the year ended December 31, 2017 and 2016. Net proceeds from sale of investments for the year ended
December 31, 2015 was $1,480. Net realized losses from sale of investments for the year ended December 31, 2017, 2016 and 2015 was $nil, $nil and $5,178,
respectively.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The unrealized holding gain (loss) for the investments, net of tax that were recognized in other comprehensive income for the year ended December 31,
2017 was other comprehensive loss of $(240,000), as compared to $5,300,633 and $(1,376,540) for the year ended December 31, 2016 and 2015, respectively.
Reclassification adjustment of $5,557,939 in connection with other-than-temporary impairment of investments was recorded in other comprehensive income for
the year ended December 31, 2016. No adjustment was recorded in other comprehensive income for the year ended December 31, 2017 and 2015.
The Company tracks each investment with an unrealized loss and evaluates them on an individual basis for other-than-temporary impairments, including
obtaining corroborating opinions from third party sources, performing trend analysis and reviewing management’s future plans. When investments have declines
determined by management to be other-than-temporary the Company recognizes write downs through earnings. Other-than-temporary impairment of
investments for the year ended December 31, 2017 was $nil, as compared with $4,611,714 and $123,428 for the year ended December 31, 2016 and 2015,
respectively.
NOTE 8 – FAIR VALUE ACCOUNTING
The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on
how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of
valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The carrying value of financial items of the Company including cash and cash equivalents, accounts receivable, other receivables, accounts payable and
accrued liabilities, approximate their fair values due to their short-term nature and are classified within Level 1 of the fair value hierarchy. The Company’s
investments are classified within Level 2 of the fair value hierarchy because of the insufficient volatility of the three stocks traded in OTC market. The Company
did not have any Level 3 financial instruments as of December 31, 2017 and 2016.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Assets measured at fair value within Level 2 on a recurring basis as of December 31, 2017 and 2016 are summarized as follows:
Assets:
Equity position in Alpha Lujo, Inc.
Equity position in Arem Pacific Corporation
Assets:
Equity position in Alpha Lujo, Inc.
Equity position in Arem Pacific Corporation
As of December 31, 2017
Fair Value Measurements at Reporting Date Using:
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Total
Significant Other
Significant
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
$
29,424
240,000
269,424
$
$
-
-
-
$
$
29,424
240,000
269,424
$
$
-
-
-
As of December 31, 2016
Fair Value Measurements at Reporting Date Using:
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Total
Significant Other
Significant
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
$
29,424
480,000
509,424
$
$
-
-
-
$
$
29,424
480,000
509,424
$
$
-
-
-
No shares were acquired during the year ended December 31, 2017 and 2016.
As of December 31, 2017 and 2016, the Company holds 8,000,000 shares in Arem Pacific Corporation, 2,942,350 shares in Alpha Lujo, Inc. and
2,057,131 shares in Wonder International Education and Investment Group Corporation. All available-for-sale investments held by the Company at December
31, 2017 and 2016 have been valued based on level 2 inputs due to the limited trading of all three of these companies.
NOTE 9 – INTANGIBLE ASSETS
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company evaluates the continuing value of the
intangibles at each balance sheet date and records write-downs if the continuing value has become impaired. An impairment is determined to exist if the
anticipated undiscounted future cash flow attributable to the asset is less than its carrying value. The asset is then reduced to the net present value of the
anticipated future cash flow.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
As of December 31, 2017 and 2016, intangible assets, consisted of the following:
Patents & knowhow & license
Cost basis
Less: accumulated amortization
Software
Cost basis
Less: accumulated amortization
Total intangibles, net
December 31,
2017
December 31,
2016
$
$
17,674,431
(5,325,113)
12,349,318
$
$
17,560,496
(3,539,617)
14,020,879
December 31,
2017
December 31,
2016
$
$
$
158,273
(87,899)
70,374
$
$
125,964
(54,262)
71,702
12,419,692
$
14,092,581
All software is provided by a third party vendor, is not internally developed, and has an estimated useful life of 5 years. Patents, knowhow and license are
amortized using an estimated useful life of five to ten years. Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $1,790,258,
$1,784,208 and $1,521,629, respectively. Estimated amortization expense for each of the ensuing years are as follows for the years ending December 31:
Years ending December 31,
2018
2019
2020
2021
2022 and thereafter
Amount
1,788,814
1,787,586
1,784,335
1,778,866
5,280,091
12,419,692
$
$
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Table of Contents
NOTE 10 – LEASES
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The Company leases facilities under non-cancellable operating lease agreements. These facilities are located in the United States, Hong Kong and
China. The Company recognizes rental expense on a straight-line basis over the life of the lease period. Rent expense under operating leases for the year
ended December 31, 2017, 2016 and 2015 was approximately $4,345,893, $1,043,968 and $1,043,833, respectively.
As of December 31, 2017, the Company has the following future minimum lease payments due under the foregoing lease agreements:
Years ending December 31,
2018
2019
2020
2021
2022 and thereafter
NOTE 11 – RELATED PARTY TRANSACTIONS
Amount
3,062,842
2,822,735
2,627,027
2,547,990
12,623,886
23,684,480
$
$
As of December 31, 2017 and 2016, accrued expenses included director fees of $25,882 and $3,082 due to independent director Mr. Gang Ji.
On December 15, 2017, the Company entered into a Share Purchase Agreement with three of its executive officers, pursuant to which the Company
agreed to sell, and the three executive officers agreed to purchase an aggregate of 41,667 shares of the Company’s common stock, par value $0.001 per share
at $12.00 per share, for total gross proceeds of approximately $500,000. The transaction closed on December 22, 2017.
The Company advanced petty cash to officers for business travel purpose. As of December 31, 2017 and 2016, other receivables due from officers for
business travel purpose was $8,531 and $nil, respectively.
NOTE 12 – EQUITY
ASC Topic 505, “Equity”, paragraph 505-50-30-6 establishes that share-based payment transactions with nonemployees shall be measured at the fair
value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
In March 2015, the Company closed a financing transaction pursuant to which it sold 515,786 shares of the Company’s common stock to selected
investors at $38 per share, for total gross proceeds of approximately $19,600,000. The shares were sold pursuant to separate subscription agreements between
the Company and each investor. The Company incurred a finder fee of $979,992, equal to 5% of the gross proceeds from the investors that were introduced by
such finders, which was recorded as reduction in equity.
On June 26, 2015, the Company completed its acquisition of the certain license rights to technology and know-how from Blackbird BioFinance, LLC
(“Blackbird”) and entered into an assignment and assumption agreement to acquire all of Blackbird’s right, title and interest in and to the exclusive worldwide
license to a CD40LGVAX vaccine from the University of South Florida. According to the asset purchase agreement, $1,050,500 in restricted common stock
(based on the 20-day volume-weighted average price of the Company’s stock on the closing date) will be delivered to Blackbird at closing, thus 28,120 shares of
Company common stock were issued as part of the consideration of this transaction. In addition, 18,747 shares of Company common stock (equal to $700,000
based on the 20-day volume-weighted average price of the Company’s stock on the closing date) would be delivered to Blackbird on the 6 month anniversary of
the closing date upon satisfaction of certain conditions according to the agreements. Above shares were issued in November 2015.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
On February 4, 2016, the Company conducted an initial closing of a financing transaction (the “Financing”), pursuant to which it sold an aggregate of
263,158 shares of the Company’s common stock, par value $0.001 per share to Wuhan Dangdai Science & Technology Industries Group Inc. (the “Investor”) at
$19.00 per share, for total gross proceeds of approximately $5,000,000. The Investor agreed to purchase, in one or more subsequent closings, up to an
additional 2,006,842 shares on or before April 15, 2016, for a potential aggregate additional raise of $38,130,000. The Company had received the proceeds of
$5,000,000 on February 4, 2016.
On April 15, 2016, the Company completed the second and final closing of the Financing with the Investor, pursuant to which the Company sold to the
Investor 2,006,842 shares of the Company’s Common Stock, for approximately $38,130,000 in gross proceeds. The aggregate gross proceeds from both
closings in the Financing totaled approximately $43,130,000. In the aggregate, 2,270,000 shares of Common Stock were issued in the Financing.
In connection with the above Financing, the Company agreed to pay a finder’s fee equal to 5% of the gross proceeds comprised of (i) $657,628 from the
gross proceeds of the Financing and (ii) 78,888 restricted shares of Common Stock based on the per share purchase price in the Financing of $19 per share. On
April 28, 2016, 78,888 shares of common stock were issued to the finder, which was recorded against the equity.
On December 15, 2017, the Company entered into a Share Purchase Agreement with three of its executive officers, pursuant to which the Company
agreed to sell, and the three executive officers agreed to purchase an aggregate of 41,667 shares of the Company’s common stock, par value $0.001 per share
at $12.00 per share, for total gross proceeds of approximately $500,000. The transaction closed on December 22, 2017.
On December 26, 2017, the Company entered into a Share Purchase Agreement with two investors, pursuant to which the Company agreed to sell and
the two investors agreed to purchase from the Company, an aggregate of 1,166,667 shares of the Company’s common stock, par value $0.001 per share, at
$12.00 per share, for total gross proceeds of approximately $14,000,000. The transaction closed on December 28, 2017. Together with a private placement with
three of its executive officers on December 22, 2017, the Company raised an aggregate of approximately $14.5 million in the two private placements in
December 2017.
During the year ended December 31, 2017, 2016 and 2015, the Company expensed $4,512,192, $4,742,920 and $7,182,118 associated with unvested
options awards and $833,019, $709,497 and $410,320 associated with restricted common stock issuances, respectively.
During the year ended December 31, 2017, 2016 and 2015, options for 57,400, 196,185 and 152,404 underlying shares were exercised, 57,400,
196,185 and 152,404 shares of the Company’s common stock were issued accordingly.
During the year ended December 31, 2017, 2016 and 2015, 68,446, 24,660 and 6,253 shares of the Company's restricted common stock were issued to
directors, employees and advisors respectively.
During the year ended December 31, 2017, the Company repurchased 426,794 shares of the Company’s common stock with the total cost of
$3,977,929. There was no repurchase of stock in 2016. Details are as follows:
Period
June 9, 2017 ~ June 30, 2017
July 1, 2017 ~ September 30, 2017
October 1, 2017 ~ December 31, 2017
Total
Total number of
shares
purchased
Average price
paid per share
Total number of
shares
purchased as part
of publicly
announced plans
or programs
Maximum dollar
value of shares
that may yet be
purchased under
the plans or
programs
170,169
114,156
142,469
426,794
$
$
$
$
7.98
9.51
10.77
9.32
170,169
114,156
142,469
426,794
6,022,071
The Company's Board of Directors has approved a new stock repurchase program granting the company authority to repurchase up to $10 million in
common shares (the "2017 Stock Repurchase Program") through open market purchases pursuant to a plan adopted in accordance with Rule 10b5-1 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and in accordance with Rule 10b-18 of the Exchange Act and was announced on June 1,
2017.
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The future minimum lease payment due under the executed operating lease agreements as of December 31, 2017 was presented in Note 10 to the
consolidated financial statements.
Capital commitments
As of December 31, 2017, the capital commitments of the Company are summarized as follows:
Contracts for acquisition of plant and equipment being or to be executed
F-25
December 31,
2017
1,444,449
$
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 14 – STOCK BASED COMPENSATION
Our stock-based compensation arrangements include grants of stock options and restricted stock awards under the Stock Option Plan (the “2009
Plan”,“2011 Plan”, “2013 Plan” and the “2014 Plan”), and certain awards granted outside of these plans. The compensation cost that has been charged against
income related to stock options (including shares issued for services and expense true-ups and reversals described in Note 12) for the year ended December 31,
2017, 2016 and 2015 was $4,512,192, $4,742,920 and $7,182,118 , respectively. The compensation cost that has been charged against income related to
restrict stock awards for the year ended December 31, 2017, 2016 and 2015 was $833,019, $709,497 and $410,320 , respectively.
These expenses are included in overhead, general and administrative expense, selling and marketing expense as well as research and development
expenses in our Consolidated Statements of Operations.
As of December 31, 2017, there was $4,362,541 all unrecognized compensation cost related to an aggregate of 592,249 of non-vested stock option
awards and $385,331 related to an aggregate of 34,105 of non-vested restricted stock awards. Restricted stock awards under long-term incentive plan is not
accounted for as attendant could chose to surrender part of the restricted stock awards for individual income tax payment purpose. These costs are expected to
be recognized over a weighted-average period of 2.29 years for the stock options awards and 1.37 years for the restricted stock awards.
During the year ended December 31, 2017, the Company issued an aggregate of 547,793 options under the 2011 Plan, 2013 Plan and 2014 Plan to
officers, directors, employees and advisors. The grant date fair value of these options was $4,600,926 using Black-Scholes option valuation models with the
following assumptions: grant date strike price from $5.3 to $13.2, volatility 85.41% to 89.62%, expected life 6.0 years, and risk-free rate of 1.86% to 2.29%. The
Company is expensing these options on a straight-line basis over the requisite service period.
During the year ended December 31, 2016, the Company issued an aggregate of 309,382 options under the 2013 Plan and 2014 Plan to officers,
directors, employees and advisors. The grant date fair value of these options was $3,811,362 using Black-Scholes option valuation models with the following
assumptions: grant date strike price from $12.13 to $40, volatility 88.44% to 90.03%, expected life 6.0 years, and risk-free rate of 1.07% to 2.17%. The Company
is expensing these options on a straight-line basis over the requisite service period.
During the year ended December 31, 2015, the Company issued an aggregate of 721,779 options under the 2013 Plan and 2014 Plan to officers,
directors and employees. The grant date fair value of these options was $13,687,655 using Black-Scholes option valuation models with the following
assumptions: exercise price equal to the grant date stock price of $12.91 to $38.4, volatility 88.41% to 99.27%, expected life 6.0 years, and risk-free rate of
1.39% to 1.92%. The Company is expensing these options on a straight-line basis over the requisite service period.
F-26
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The following table summarizes stock option activity as of December 31, 2017 and 2016 and for the year ended December 31, 2017:
Outstanding at December 31, 2015
Grants
Forfeitures
Exercises
Outstanding at December 31, 2016
Grants
Forfeitures
Exercises
Outstanding at December 31, 2017
Weighted-
Average Exercise
Price
$
Weighted-
Average
Remaining
Contractual Term
(in years)
7.8
$
Aggregate
Intrinsic Value
17,701,962
7.3
$
6,355,072
7.0
$
4,909,194
12.42
18.65
19.45
4.51
12.59
11.34
20.68
5.37
11.54
Number of
Options
1,952,648
309,382
(458,030)
(196,185)
1,607,815
547,793
(206,019)
(57,400)
1,892,189
$
$
Vested and exercisable at December 31, 2017
1,299,940
$
10.52
6.1
$
4,619,527
Exercise
Price
$3.00 - $4.95
$5.00 - $9.19
$9.20+
Number of Options
Outstanding
Exercisable
185,547
569,204
1,137,438
1,892,189
185,547
510,768
603,625
1,299,940
The aggregate intrinsic value for stock options outstanding is defined as the positive difference between the fair market value of our common stock and
the exercise price of the stock options.
Cash received from option exercises under all share-based payment arrangements for the year ended December 31, 2017, 2016 and 2015 was
$308,371, $885,680 and $682,303, respectively.
F-27
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Table of Contents
NOTE 15 – NET LOSS PER SHARE
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Basic and diluted net loss per common share is computed on the basis of our weighted average number of common shares outstanding, as determined
by using the calculations outlined below:
Net loss
Weighted average shares of common stock
Dilutive effect of stock options
Restricted stock vested not issued
Common stock and common stock equivalents
Net loss per basic share
Net loss per diluted share
For the Year Ended
December 31,
2017
$ (25,490,310)
2016
$ (28,208,376)
2015
$ (19,447,721)
14,345,604
-
-
14,345,604
13,507,408
-
-
13,507,408
11,472,306
-
-
11,472,306
$
$
(1.78)
$
(1.78)
$
(2.09)
$
(2.09)
$
(1.70)
(1.70)
For the year ended December 31, 2017, 2016 and 2015, the effect of conversion and exercise of the Company’s outstanding options are excluded from
the calculations of dilutive net income (loss) per share as their effects would have been anti-dilutive since the Company had generated loss for the year ended
December 31, 2017, 2016 and 2015.
NOTE 16 – INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period during which such rates are enacted.
The Company considers all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry-
forward periods), and projected taxable income in assessing the realizability of deferred tax assets. In making such judgments, significant weight is given to
evidence that can be objectively verified. Based on all available evidence, in particular our three-year historical cumulative losses, recent operating losses and
U.S. pre-tax loss for the year ended December 31, 2017, we recorded a valuation allowance against our U.S. net deferred tax assets. In order to fully realize the
U.S. deferred tax assets, we will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax
code.
F-28
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The following represent components of the income tax (expense) credit for the year ended December 31, 2017, 2016 and 2015:
Current:
US federal
US state
Foreign
Total current tax credit (expense)
Deferred:
Federal
State
Foreign
Total deferred tax expense
Total income tax credit (expense)
For the Year Ended
December 31,
2016
2017
$
-
(2,450)
$
-
(4,093)
(2,450)
$
(4,093)
$
-
-
-
-
$
$
-
-
-
-
$
$
2015
733,158
(4,557)
-
728,601
-
-
-
-
(2,450)
$
(4,093)
$
728,601
$
$
$
$
$
Tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets at December 31, 2017 and 2016 are
presented below:
Deferred tax assets:
Net operating loss carry forwards (offshore)
Net operating loss carry forwards (US)
Accruals (offshore)
Accrued compensation (US)
Stock-based compensation (US)
Investments (US)
Credits (US)
Property and equipment
Goodwill & intangibles
Subtotal
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Subtotal
Net deferred tax asset
December 31,
2017
December 31,
2016
$
$
5,448,339
3,864,824
588,277
83,071
2,315,801
1,893,532
217,329
123
49,653
14,460,949
(14,460,949)
-
3,827,747
4,496,655
280,756
25,168
3,018,905
3,673,382
97,504
-
33,079
15,453,196
(15,452,737)
459
-
-
$
-
$
(459)
(459)
-
In each period since inception, the Company has recorded a valuation allowance for the full amount of net deferred tax assets, as the realization of
deferred tax assets is uncertain. As a result, the Company has not recorded any federal or state income tax benefit in the consolidated statements of operations
and comprehensive income (loss).
F-29
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
On December 22, 2017, US President signed tax reform bill (Tax Cut and Jobs Act (H.R.1)) and reduced top corporate tax rate from 35% to 21%
effective from January 1, 2018. Pursuant to this new Act, non-operating loss carry back period is eliminated and an indefinite carry forward period is permitted.
As of December 31, 2017, the Company had net operating loss carryforwards of $16 million for U.S federal purposes, $6 million for U.S. state purposes. As of
December 31, 2017, the Company had net operating loss carryforwards of $14 million for Chinese income tax purposes, such losses are set to expire in 2022 for
Chinese income tax purposes. All deferred income tax expense is offset by changes in the valuation allowance pertaining to the Company's existing net
operating loss carryforwards due to the unpredictability of future profit streams prior to the expiration of the tax losses. The Company's effective tax rate differs
from statutory rates of 21% for U.S. federal income tax purposes, 15% ~ 25% for Chinese income tax purpose and 16.5% for Hong Kong income tax purposes
due to the effects of the valuation allowance and certain permanent differences as it pertains to book-tax differences in the value of client shares received for
services.
Pursuant to the Corporate Income Tax Law of the PRC, all of the Company’s PRC subsidiaries are liable to PRC Corporate Income Taxes (“CIT”) at a
rate of 25% except for Cellular Biomedicine Group Ltd. (Shanghai) (“CBMG Shanghai”). According to Guoshuihan 2009 No. 203, if an entity is certified as an
“advanced and new technology enterprise”, it is entitled to a preferential income tax rate of 15%. CBMG Shanghai obtained the certificate of “advanced and new
technology enterprise” dated October 30, 2015 with an effective period of three years and the provision for PRC corporate income tax for CBMG Shanghai is
calculated by applying the income tax rate of 15% from 2015. CBMG Shanghai will still apply the certificate of “advanced and new technology enterprise” in
2018.
Income tax expense for year ended December 31, 2017, 2016 and 2015 differed from the amounts computed by applying the statutory federal income
tax rate of 35% to pretax income (loss) as a result of the following:
Effective Tax Rate Reconciliation
Income tax provision at statutory rate
State income taxes, net of federal benefit
Rate deduction
Foreign rate differential
Other permanent difference
Change in valuation allowance
Total tax credit (expense)
NOTE 17 – COLLABORATION AGREEMENT
For the Year
Ended
December 31,
2017
For the Year
Ended
December 31,
2016
For the Year
Ended
December 31,
2015
35%
0%
(20)%
(13)%
(2)%
0%
0%
35%
0%
0%
(9)%
(2)%
(24)%
0%
35%
0%
0%
(12)%
(4)%
(15)%
4%
Part of AG’s business includes a collaboration agreement to establish and operate a biologic treatment center in the Jilin province of China. Under the
terms of the Collaboration Agreement dated December 10, 2012 and its supplementary agreement dated July 19, 2014 (the “Collaboration Agreement”), AG’s
collaborative partner (the “Partner”) funded the development of the center and provides certain ongoing services. In exchange, the Partner receives preferred
repayment of all funds that were invested in the development, 60% of the net profits until all of the invested funds are repaid, and 40% of the net profits
thereafter, and the rights to the physical assets at the conclusion of the agreement. We accounted for this transaction in accordance with ASC 808 Collaborative
Arrangements and have reflected all assets and liabilities of the treatment center. With our recent build-up of multiple cancer therapeutic technologies, we have
prioritized our clinical efforts on developing CAR-T technologies, Vaccine, Tcm and TCR clonality technologies, and not actively pursuing the fragmented
technical services opportunities.
In June 2016, the Company and the Partner agreed to terminate the Collaboration Agreement and in July 2016 entered into a cooperation termination
agreement (the “Termination Agreement”) with the Partner. In August 2016, in accordance with the Termination Agreement, the Company paid $0.3 million
(RMB2 million equivalent) to settle all the liabilities with the Partner and retain the ownership of all the assets under the Collaboration Agreement.
F-30
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Table of Contents
NOTE 18 – SEGMENT INFORMATION
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
The Company is engaged in the development of new treatments for cancerous and degenerative diseases utilizing proprietary cell-based technologies,
which have been organized as one reporting segment since they have similar nature and economic characteristics. The Company’s principle operating decision
maker, the Chief Executive Officer, receives and reviews the result of the operation for all major cell platforms as a whole when making decisions about
allocating resources and assessing performance of the Company. In accordance with FASB ASC 280-10, the Company is not required to report the segment
information.
NOTE 19 – SUBSEQUENT EVENTS
On January 30, 2018 and February 5, 2018, the Company entered into securities purchase agreements with certain investors pursuant to which the
Company agreed to sell, and the investors agreed to purchase from the Company, an aggregate of 1,719,324 shares of the Company’s common stock, par
value $0.001 per share, at $17.80 per share, for total gross proceeds of approximately $30.6 million. The transaction closed on February 5, 2018.
Pursuant to the Purchase Agreement, the Investors have the right to nominate one director to the board of directors of the Company to stand for election
at the 2018 Annual Meeting of Stockholders. Effective as of the closing of the February 2018 private placement, the Board elected Bosun S. Hau as a
nonexecutive Class III director of the Company.
On February 6, 2018, driven primarily by the Company’s strategy move to expand its business operations in early diagnosis and cancer intervention,
Meng Xia transitioned from the role of Chief Operating Officer to Head of the Early Diagnosis & Intervention for the Company.
On February 15, 2018, the Company obtained a 36 months exclusive option with Augusta University to to negotiate a royalty-bearing, exclusive license
to the patent rights owned by the Augusta University relating to an invention to identify novel alpha fetoprotein specific T-cell receptors (TCR) for a hepatocellular
carcinoma immunotherapy ( “HCC”). The Company plan to evaluate the feasibility and opportunities of this novel alpha fetoprotein TCR to redirect T Cells for the
HCC indication.
F-31
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Table of Contents
CELLULAR BIOMEDICINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 20 – UNAUDITED QUARTERLY FINANCIAL INFORMATION
Q4
Year ended December 31, 2017
Q2
Q1
Q3
Total
$
68,691 $
37,266
336,817
174,599
(6,922,585) (6,202,214) (6,203,518) (6,161,993) (25,490,310)
106,787 $
51,493
62,914 $
24,817
98,425 $
61,023
(0.48)
(0.48)
(0.43)
(0.43)
(0.43)
(0.43)
(0.43)
(0.43)
(1.78)
(1.78)
Q4
Q3
Q2
Q1
Total
Year ended December 31, 2016
$
57,828 $
33,319
627,930
(232,487)
(6,139,761) (10,661,220) (7,197,282) (4,210,113) (28,208,376)
71,599 $
(251,988)
488,491 $
(14,702)
10,012 $
884
(0.43)
(0.43)
(0.75)
(0.75)
(0.52)
(0.52)
(0.35)
(0.35)
(2.09)
(2.09)
F-32
Selected Income Statement Data:
Net sales and revenue
Gross Profit
Net loss
Net loss per share :
Basic
Diluted
Selected Income Statement Data:
Net sales and revenue
Gross Profit/(Loss)
Net loss
Net loss per share :
Basic
Diluted
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
List of Subsidiaries of Cellular Biomedicine Group, Inc.:
Name
Cellular Biomedicine Group Ltd.
Cellular Biomedicine Group (Wuxi) Ltd.
Cellular Biomedicine Group (Shanghai) Ltd.
Beijing Agreen Biotechnology Co., Ltd.
Exhibit 21.1
State of Incorporation/Formation
Hong Kong
People’s Republic of China
People’s Republic of China (variable interest entity)
People’s Republic of China (100% owned by Cellular Biomedicine Group
(Shanghai) Ltd.)
Shanghai Cellular Biopharmaceutical Group Ltd.
People’s Republic of China (100% owned by Cellular Biomedicine Group
(Shanghai) Ltd.)
Wuxi Cellular Biopharmaceutical Group Ltd.
People’s Republic of China (100% owned by Cellular Biomedicine Group
Eastbridge Investment Corporation
Cellular Biomedicine Group Vax, Inc.
(Shanghai) Ltd.)
Delaware
California
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
Cellular Biomedicine Group, Inc.
19925 Stevens Creek Blvd., Suite 100
Cupertino, California 95014
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-210337) and Forms S-8 (File No. 333-211679,
333-198692, 333-187799 and 333-158583) of Cellular Biomedicine Group, Inc. and its subsidiaries and variable interest entities (the “Company”) of our reports
dated March 5, 2018, relating to the Company’s consolidated financial statements and the effectiveness of the Company’s internal control over financial
reporting, which appear in this Annual Report on Form 10-K for the year ended December 31, 2017.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
BDO China Shu Lun Pan Certified Public Accountants LLP
Shenzhen, the People’s Republic of China
March 5, 2018
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Bizuo (Tony) Liu, certify that:
1.I have reviewed this annual report on Form 10-K of Cellular Biomedicine Group, Inc. (the "registrant");
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Dated: March 5, 2018
By:
/s/ Bizuo (Tony) Liu
Bizuo (Tony) Liu
Chief Executive Officer and Chief Financial Officer
(principal executive officer and financial and accounting
officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Exhibit 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Cellular Biomedicine Group, Inc., a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the "Form 10-K") of the Company fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: March 5, 2018
By:
/s/ Bizuo (Tony) Liu
Bizuo (Tony) Liu
Chief Executive Officer and Chief Financial Officer
(principal executive officer and financial and accounting
officer)
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code) and is not being filed as part of Form 10-K or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.